Carnegie Mellon University
October 22, 2020

Mohan and Muller blog post, "Monetary damages – a better measure of sustainability than emissions?"

In a recently published blog post in PRI, EPP PhD student Aniruddh Mohan and EPP Professor Nicholas Muller use their paper, The Growth of Nations Revisited: Global Environmental Accounting from 1998 to 2018, to argue that what matters to societal welfare is not the physical tonnage of emissions, but the monetary damage caused by them.

In their post, Mohan and Muller argue that putting a price on impact allows for comparison across pollutants. Monetary damage can be deducted from traditional measures of production, or firm value. Fundamentally, it is damage, or impact, that determines sustainability and therefore, this metric should guide investors as they pursue environmentally responsible asset allocations.

In their paper, Mohan and Muller augment national economic data with measures of environmental damage for more than 160 countries between 1998 and 2018. They derived environmentally adjusted value added (EVA) (Muller, 2014), which deducts pollution damage (gross external damage or GED) from reported GDP. GED is the total damage from unabated emissions, so, even though in some countries environmental policies have succeeded in reducing emissions, GED tracks what is still being emitted. By including external costs, EVA is a more comprehensive measure of national welfare than GDP.

What difference does EVA make to definitions of sustainability?

Mohan and Muller use China, the country with the highest level of CO2 emissions and rapidly increasing GDP, as an example. They found that average levels of ambient fine particulate matter (PM2.5) peaked in 2011, while CO2 emissions have been flat in recent years. From this perspective, it may be reasonable to conclude that China is approaching sustainable growth. Yet, monetary damages from these two pollutants have increased 50% since 2011 and averaged an annual growth rate of 5%, with real per-capita damages doubling every 14 years.

Looking at the primary contributor to climate change, CO2, the damage from each additional ton emitted (the marginal damage) increases as the global stock of CO2 increases. A ton of CO2 emitted in 2020, therefore, has far higher marginal damage than a ton emitted in 1970. Therefore, even as CO2 emissions fall, their damage may be growing due to the increase in marginal damage of each ton emitted.

Mohan and Muller say that policymakers should therefore focus on damages, not emissions.

In conclusion, Mohan and Muller argue that sustainability is determined by impact, not physical emissions, and that impacts should be expressed in monetary terms. Monetizing damage also permits calculations of net firm, industry, or economy value-add as well as growth. Their calculations provide a different lens – that is cognisant of environmental impacts – to assess these.

To read their full paper, go here