MACRO Seminar: Maarten De Ridder, LSE

Speaker

Maarten De Ridder, LSE

Title

Emissions-Adjusted Total Factor Productivity*

Abstract

Traditional estimates of total factor productivity (TFP) measure the output that a bundle of inputs produces. But production comes with emissions that remain in the atmosphere for decades, which means that productivity does not capture the full effect of today’s production on the present value of consumption. We propose a measure for emissions-adjusted total factor productivity (TFPE) that takes these long-run effects into account. TFPE is a relevant productivity index under general assumptions consistent with canonical integrated assessment models and “green national accounts.” It relies only on publicly available data, as well as an estimate of the social cost of carbon–a frequently measured statistic in empirical work. TFPE is lower than TFP, but growth in TFPE exceeds TFP growth when production becomes less emissions intensive. For traditional (small) estimates on the economic effects of climate change, TFPE is approximately equal to TFP. For recent (large) estimates of the social cost of carbon, however, TFPE and TFP decouple. In the United States, the rapid decline in emissions over the past 20 years has raised annual TFPE growth by 0.4 percentage points. In contrast to traditional productivity measures, growth in TFPE accelerates after the mid-2000s. A back-of-the-envelope calculation finds that achieving net-zero emissions would raise U.S. TFPE by 27%.

Keywords: Productivity, Emissions, Climate, Growth