Total Factor Productivity Growth and the Environment: A Case for Green Growth Accounting

We examine whether the use of the environment, proxied by CO2 emissions, as a factor of production contributes, in addition to con- ventional factors of production to output growth, and thus it should be accounted for in total factor productivity growth (TFPG) mea- surement and deducted from the ‘residual’. A theoretical framework of growth accounting methodology with environment as a factor of production which is unpaid in the absence of environmental policy is developed. Using data from a panel of 23 OECD countries, we show that emissions’growth have a statistically signi…cant contribution to the growth of output, that emission augmenting technical change is present along with labor augmenting technical change, and that part of output growth which is traditionally attributed to technical change should be attributed to the use of the environment as a not fully com- pensated factor of production. Our results point towards the need for developing a concept of Green Growth Accounting.