Economists from the University of Copenhagen have developed green models to calculate environmental and climate effects in Denmark's entire economy. The models can have a major impact on our view of economic growth and green transition.
How much would you pay for the air you breathe to be clean and to hear a lark sing? How much does the emission of one ton of CO2 cost in kroner and øre, and can you put a price on water pollution?
All this is now possible. A group of researchers from the University of Copenhagen (in collaboration with researchers from Aarhus University, DREAM and Statistics Denmark) are launching two new green models for the Danish economy: Denmark's green GDP and the GreenREFORM model. The new green models are to give the streams, the forests, the atmosphere and endangered species such as the hazel dormice a voice in the Danish economy.
Peter Birch Sørensen, professor of economics at the University of Copenhagen, has been at the forefront of developing the models. He acknowledges that it may seem strange that being able to go for a walk in the forest should suddenly be valued in the economic models:
"Understandably, many find it odd to put a price on a lark's song and other natural phenomena. But if we don't, we risk that important environmental values will be under-prioritised in the political process," he emphasizes.
A green GDP
The Green GDP includes the value of environmental and natural services and takes into account the costs of pollution, emission of greenhouse gases and depletion of Denmark's natural capital, as well as the gain from investing in increasing the natural capital.
The Green GDP provides an opportunity to highlight the importance of the environment for the economy. By following the development of the Green GDP, one can assess whether and to what extent the economic growth - measured by the growth in the traditional GDP - has occurred at the expense of the environment and climate.
We use GDP - gross domestic product - to measure overall economic activity in society and assess how the Danish economy is doing in general. However, the traditional GDP has been criticized for not taking into account the environmental and climate effects of society's production and consumption. The green GDP does exactly that.
The green GDP values i.a. loss of biodiversity, emission of greenhouse gases and pollution of the air and water environment. The green GDP can therefore help the population and the politicians to assess whether the economic growth has occurred at the expense of the climate and the environment.
But even if environmental and climate considerations are taken into account, the green GDP may well increase in a period when, for example, there have been large emissions of greenhouse gases, if at the same time there has been a large growth in the economy in general. So does it even make sense to include the environment and climate in the traditional economic models? Why not just calculate it separately?
"The green GDP makes it possible to value the environmental and natural assets. In the first step, we calculate physical measures of how much we have depleted of various natural resources and how much we have emitted of various pollutants. That in itself is valuable information. In the next step, we then calculate the costs or gains in monetary terms," says Peter Birch Sørensen and continues:
"This gives us an overall picture of the damages to the environment. The problem with focusing solely on the physical targets for the environmental impact is that there are many different dimensions and aspects of environmental development that can point in different directions. But when we value them in monetary terms, we get an overall picture of which way things are going."
What are you willing to pay?
The research group has determined the value of the various natural assets by utilizing studies in which a representative group of the population is asked how much they are willing to pay for a specific environmental or climate improvement.
In these kinds of studies, the interview groups are, for example, asked to imagine that the state or their municipality has to decide on the issue, and are then asked how much more they would pay in taxes to get the environmental or climate project completed. And the Danes want to pay. An example: The average citizen would like to pay more in taxes to avoid the extinction of endangered animal species.
In other cases, the researchers have valued the environment by calculating how much it will cost to achieve a politically determined environmental or climate goal.
Calculates future footprints
GreenREFORM is a new environmental and climate economic simulation model for the Danish economy. The model contains a detailed description of the sectors that have particular importance for the environment and climate: the energy sector, agriculture, the transport sector and the waste treatment sector.
The model also describes the emission of pollutants from the other parts of the economy as well as a number of technological options to lower emissions.
The GreenREFORM model can be used to calculate the environmental and climate effects of the expected economic development and to assess the business and socio-economic consequences of environmental, energy and climate policy measures such as greenhouse gas taxes.
Both projects have drawn on data from Statistics Denmark's green national accounts and have simultaneously led to the development of new data sets that can be used to shed light on the environmental and climate impacts of economic activity.
The KR Foundation and the Carlsberg Foundation have supported the projects.
While the green GDP analyses the economic activity that has taken place in society, the GreenREFORM model looks ahead. The simulation model can be used to assess how a political initiative or reform will affect the emission of air pollutants or greenhouse gases. It can therefore illustrate the environmental and climate consequences of various political initiatives.
At the same time, the model can be used to calculate what is needed to achieve the politically determined environmental and climate goals. If we are far from reaching them, the model can tell how much is needed to get back on track. And then the model can help politicians assess the effect of various environmental and climate initiatives - and thus help politicians prioritize the initiatives appropriately.
The GreenREFORM model is the largest of its kind in the world and has attracted interest worldwide. Denmark's Ministry of Finance has presented the model to the U.S. Biden administration, and the OECD has highlighted the model to other countries. The GreenREFORM model group in DREAM, which is today the primary driving force in the final development of the model, is in contact with several countries that are interested in introducing a similar model.
In Denmark, the Ministry of Finance and a number of other ministries and institutions are expected to adopt the model during 2023.
Peter Birch Sørensen hopes that the model will be used when politicians make economic plans in the future. He hopes that it will become standard practice to use the model to assess the environmental and climate consequences of the Ministry of Finance's plans for the development of the Danish economy and political reforms - and that the plans are adjusted if it appears that they do not reach the most important environmental and climate goals.
"Hopefully, we will be able to integrate environmental and climate considerations more systematically in the planning of economic policy. Until now, policy work has often taken place in different boxes and systems that have had difficulty talking to each other," he explains and elaborates:
"Now we get a common basis for analysis and a common framework of understanding, so that you can more easily communicate across ministries. Now we have a common language when we discuss the connection between economy and environment."
