Measuring sustainable welfare: A new approach to the ISEW

Sustainability and welfare assessment is a contemporary theme of major scientific and policy relevance, requiring the consideration of multiple dimensions and diverse perspectives. The economic approach to sustainability and welfare assessment has frequently relied on alternatives, or adjustments, to GDP, widely used as an indicator of macroeconomic performance. Several authors have proposed alternative indicators, such as the ISEW, which intend to measure sustainability and economic welfare in a way that avoids the limitations of GDP; namely accounting for the value of externalities, the distribution of income and natural resources depletion. Since Daly and Cobb (1989) there have been proposed improvements to the ISEW, however, its aptitude to represent a sound alternative to GDP is still the subject of scientific debate. This paper presents a new approach to the ISEW (named Modified ISEW), including new components and methodological changes for the estimation of the index. These have the purpose of avoiding some of the index shortcomings and allow for a direct comparison with the GDP, which are advantages over previous studies. An application is developed for the US case, taking advantage of wide data availability and the possibility of comparing the results with previous works. The results obtained provide a clearer picture of the success or failure of environmental and social policies, namely by avoiding the tampering effect resulting from the cumulative accounting of environmental externalities. This work also emphasizes the inadequacy of GDP as a welfare indicator, as well as the need to develop and adopt alternative indicators.