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Environmentally-Adjusted Productivity Measures For The UK

The UK economy faces two immediate and enduring challenges: anaemic productivity growth since the 2007-09 financial crisis, and the increasingly urgent threat of climate change and the associated transition to Net Zero. Though their causes are independent, policy solutions to these twin challenges cannot be. Economic statistics that can simultaneously assess progress towards productivity growth and Net Zero will be needed. With this in mind, we extend economic estimates of UK productivity growth to incorporate greenhouse gas (GHG) emissions and non-GHG air pollutants. Defining productivity as the ratio of gross value-added to inputs, we explore four deviations from the standard measure. These include: incorporating the environment (emissions) as an input, examining energy-productivity, incorporating environmental protection as a ‘good’ output, and incorporating emissions and pollutants as ‘bad’ outputs. Whilst some of these themes have been explored previously, our contribution is two-fold. First, we believe we are the first to treat environmental protection expenditure as capital investment in the UK context. More fundamentally, where previous studies have adjusted economy-wide (i.e., aggregate) productivity measures to reflect emissions, we utilise the richness of UK data to construct sector-specific environmentally-adjusted productivity. We find that incorporating emissions yields higher measured output and labour productivity, but not enough to explain the productivity puzzle. Moreover, UK energy-productivity has more than doubled since 1990. Granular, industry-level data indicates that this is mostly due to increased efficiency within industries, with only 8-18% due to changing industrial composition since 1990.