Green accounting and environmental efficiency indexes

We derive a theoretically consistent welfare measure that is to be interpreted as a "green" net national product (NNP). In our framework, environmental deterioration is modelled as an undesirable, but inherent by-product of economic activities consuming the resource base. A major advantage of our approach is that, instead of using shadow prices of pollution that are not readily available, we can focus on quantitative data on consumption baskets of desirable (goods) and undesirable (pollution) outputs actually chosen by societies. This issue has not been discussed in the context of green national income accounts to date, and here we show that this omission is partly a result of a tradition of modelling pollution as an unpriced input in growth models. Accordingly, the shadow value of pollution has been determined by preferences that have been distinguished from consumption choices. We suggest, instead, that environmental efficiency indexes based on outputs of firms or industries could be used as weights in green NNP calculations for the adjustment of environmental effects.