When economists want to help our students get some sleep, we teach national income accounting. I can't say I remember what are "C", "I", "G" or "X" but I have vague memory that we can add them up so that C + I + G+ X = toothpaste. (If we measure GNP in such units then this is correct!). Now, the environmentalists are quick to remark that non-market natural resources such as clean air and clean water and greenhouse gas emissions are used to create this output. The greens correctly point out that current national income accounting over-states our standard of living because it doesn't subtract out damage to non-market goods such as clean air. In contrast, a "true green accounting" approach would subtract off the depreciation to Mother Nature causes in the capitalist production process.
So; Net National Product (NNP) = GNP - Depreciation
So, depreciation of machines would be easy to calculate if we could price out the value of the capital stock at each point in time. But, how do we operationalize measuring the damage to Mother Nature? The NY Times wrestles with this question today and makes no progress! Seeing this gap, permit me to provide a sketch of an answer.
One quick answer is that we can cite the Stanford guys (Arrow and Goulder) and you can read their paper here.
This green accounting exercise is MUCH more challenging when the pollution in question is a local public bad such as air pollution because then the exact geographic location of the production is crucial. Why? The same factory located in downtown Manhattan will cause much more damage than if the same factory produces in rural Kansas? Why? More "victims" are exposed in downtown NYC and each Don Trump is willing to pay more to not be exposed to the pollution than his counterparts in Kansas.
So, to make this a short blog post --- let's focus on a global externality of GHG emissions. Define "f" as the emissions factor = tons of greenhouse gas emissions per dollar of GNP. Suppose we all agree that each ton of GHG emissions causes $c of damage to the world.
Under these two assumptions;
Green GNP for nation = GNP - f*GNP*c = GNP*(1-f*c)
We are done! Note that f*GNP = total national tons of GHG emissions and each one causes "$c" of damage so multiply them together and f*GNP*c is total pollution damage per year. Subtract this from GNP to yield "green GNP".
A neo-classical economist would point out that if we introduce a global cap & trade program, then the invisible hand will work great as decision makers all over the world would seek to maximize "Green Income" rather than "Income" .
Now, I recognize that GHG emissions represents just one indicator of environmental quality. If you correctly insist that we also subtract out damage done to the air and water then we can't use "macro economics" anymore because we have to track the entire economy (my Kansas example presented above). Introducing local pollutants into national income accounting is a nightmare.
