Total Factor Productivity Growth When Factors of Production Generate Environmental Externalities

Abstract

Total factor productivity growth (TFPG) has been traditionally associated with technological change. We show that when a factor of production, such as energy, generates an environmental externality in the form of CO 2 emissions which is not internalized because of lack of environmental policy, then TFPG estimates could be biased. This is because the contribution of environment as a factor of production is not accounted for in the growth accounting framework. Empirical estimates confirm this hypothesis and suggest that part of what is regarded as technology's contribution to growth could be attributed to the use of environment in output production.

Sustainable Development and Performance Measurement: Global Productivity Decomposition

“…However, there have been several studies exercising cross‐country TFP analysis, such as those by Arrow et al (), Zhou et al (), Xepapadeas and Vouvaki (), Brandt et al (), Kumar and Managi (), Mahlberg and Sahoo (), Arrow et al (), UNU‐IHDP and UNEP () and Chen et al (). However, no study offers a comprehensive review of inclusive wealth by considering natural capital and undesirable output simultaneously.…”

“…Xepapadeas and Vouvaki () found that the externality of the environment is considerable in TFP estimations, which drives traditional TFP downwards. Taking energy as an environmental factor in the aggregate production function, they found that TFP growth has been driven into the negative range.…”