Economic Insights
Environmentally Adjusted Productivity Growth and the Market Price of Greenhouse Gas Emissions for the Canadian Manufacturing Sector

This article in the Economic Insights series examines how accounting for greenhouse gas emissions as part of economic activity changes the measurement of productivity growth. Productivity growth is a commonly used measure of economic performance; it is defined as the amount of output produced relative to inputs used in production. Results indicate that, in the Canadian manufacturing sector, productivity growth that includes greenhouse gas emissions as an undesirable output of production was higher than standard measures of productivity growth, which include only desirable outputs. Higher environmentally adjusted productivity growth reflects the decline in greenhouse gas intensity (the amount of undesirable output, such as greenhouse gas emissions, relative to the amount of desirable output) of manufacturers. This article also provides estimates of the market price of greenhouse gas emissions, which are required to estimate environmentally adjusted productivity growth.

Introduction

Historically, statistical agencies such as Statistics Canada have measured economic activity with more focus on how much desirable output is produced (goods and services) and less focus on how much undesirable output (pollution) is produced as a by-product.

To determine the degree to which economic performance and environmental performance are tied, economic activity must be measured as a process that creates both desirable and undesirable outputs. Moreover, standard measures of economic activity that measure only desirable output are incomplete. One of those standard measures is productivity, which can be defined most simply as efficiency in production (Baldwin et al. 2014 and OECD, 2001). Productivity growth matters because it is one of the most important contributors to economic growth and prosperity, especially over long periods of time.

A standard productivity measure called multifactor productivity (MFP) growth compares how much desirable output is produced relative to the amount of factor inputs (labour, capital and intermediate inputs) that are used in production. A more inclusive productivity measure is environmentally adjusted multifactor productivity (EAMFP), which compares how much total output (desirable and undesirable) is produced with the same factor inputs. EAMFP was developed in a recent Statistics Canada study, Environmentally Adjusted Multifactor Productivity Growth for the Canadian Manufacturing Sector (Gu, Hussain and Willox 2019). This article summarizes the main findings of that study.

Productivity growth in Canada’s manufacturing sector from 2004 to 2015 was somewhat faster when businesses’ greenhouse gas^Note (GHG) emissions were included in the measurement of productivity growth (Chart 1). Faster productivity growth was largely caused by a decline in the intensity of GHG emissions (defined as tonnes of GHG emissions per dollar of desirable output, adjusted for inflation) among the largest GHG emitters in the manufacturing sector.^Note

Although the data used in this study end in 2012, information from Statistics Canada’s annual MFP accounts can be used to project EAMFP growth for 2013 to 2015, as represented by the dashed line in Chart 1.^Note On average, EAMFP grew 0.17% per year, compared with 0.10% for MFP over the extended 2004-to-2015 period.

Data table for Chart 1



Data table for Chart 1
Table summary
This table displays the results of Data table for Chart 1 Multifactor productivity, Environmentally adjusted multifactor productivity and Projected environmentally adjusted multifactor productivity, calculated using index (2004=100) units of measure (appearing as column headers).

	Multifactor productivity	Environmentally adjusted multifactor productivity	Projected environmentally adjusted multifactor productivity
	index (2004=100)
2004	100.00	100.00	Note ...: not applicable
2005	100.49	100.88	Note ...: not applicable
2006	100.35	100.45	Note ...: not applicable
2007	99.65	99.97	Note ...: not applicable
2008	99.33	99.66	Note ...: not applicable
2009	97.51	97.48	Note ...: not applicable
2010	98.64	98.97	Note ...: not applicable
2011	99.43	99.90	Note ...: not applicable
2012	99.96	100.47	100.47
2013	100.33	Note ...: not applicable	100.88
2014	101.11	Note ...: not applicable	101.72
2015	101.11	Note ...: not applicable	101.85
... not applicable Note: Projections are based on Equation 14 from W. Gu, J. Hussain and M. Willox, 2019, Environmentally Adjusted Multifactor Productivity Growth for the Canadian Manufacturing Sector. Source: Statistics Canada, authors’ calculations. See Footnote 3 for details.

Calculating environmentally adjusted multifactor productivity

The difference between EAMFP and MFP reflects the fact that total output is calculated differently for the two productivity measures. In the case of MFP, total output includes only desirable output. For EAMFP, total output also includes the undesirable output that is jointly produced with desirable output. Because it is unwanted, undesirable output is subtracted from desirable output, making the total output for EAMFP lower than that of MFP. Since both productivity measures are calculated as their respective total output relative to the same inputs, the level of EAMFP is lower than that of MFP, except when no undesirable output is produced.

However, the growth of MFP and EAMFP is a different story. When the quantity of inputs does not change over time but desirable output increases, MFP grows. If GHG emissions also decline, EAMFP growth will be higher than MFP growth. Put another way, if the quantity of GHG emissions relative to the quantity of desirable output produced (i.e., GHG emission intensity) declines, EAMFP will grow faster than MFP. The general decline in GHG emission intensity among Canadian manufacturers was the primary source of stronger EAMFP growth.

Measuring the quantity of pollution

Information on GHG emission quantities from Environment and Climate Change Canada was combined with information from Statistics Canada’s Annual Survey of Manufacturing) to calculate the GHG emission intensity of large emitting manufacturers (manufacturers that emitted 100,000 tonnes of GHGs or more annually). The intensity of these businesses’ GHG emissions, shown in Chart 2 (the bars for 2013 to 2015 are projected values), generally declined with some volatility over the period examined in the study.^Note

Data table for Chart 2



Data table for Chart 2
Table summary
This table displays the results of Data table for Chart 2 Price of total GHGs , Projected price of total GHGs , GHG emissions intensity and Projected GHG emission intensity , calculated using dollars and tonnes / million 2012 dollars units of measure (appearing as column headers).

	Price of total GHGs	Projected price of total GHGs	GHG emissions intensity	Projected GHG emission intensity
	dollars		tonnes / million 2012 dollars
2004	-298	Note ...: not applicable	782	Note ...: not applicable
2005	-336	Note ...: not applicable	694	Note ...: not applicable
2006	-317	Note ...: not applicable	736	Note ...: not applicable
2007	-341	Note ...: not applicable	684	Note ...: not applicable
2008	-357	Note ...: not applicable	652	Note ...: not applicable
2009	-310	Note ...: not applicable	751	Note ...: not applicable
2010	-350	Note ...: not applicable	666	Note ...: not applicable
2011	-381	Note ...: not applicable	612	Note ...: not applicable
2012	-390	-390	598	Note ...: not applicable
2013	Note ...: not applicable	-395	Note ...: not applicable	586
2014	Note ...: not applicable	-409	Note ...: not applicable	553
2015	Note ...: not applicable	-422	Note ...: not applicable	536
... not applicable Note: Greenhouse gas (GHG) emissions intensity is measured as tonnes of GHG emissions per million 2012 dollars of real gross output for businesses that emit 100,000 tonnes of GHG or more between 2004 and 2012. Projections are based on Equation 5 from W. Gu, J. Hussain and M. Willox, 2019, Environmentally Adjusted Multifactor Productivity Growth for the Canadian Manufacturing Sector. Source: Statistics Canada, authors' calculations. See Footnote 4 for details.

Measuring the cost of pollution

With information on quantities of undesirable outputs, price information for undesirable outputs—which is needed to calculate EAMFP—was estimated using an economic model similar to those used in two studies from the Organisation for Economic Co-operation and Development by Brandt, Schreyer and Zipperer (2014), and Dang and Mourougane (2014). Over the 2004-to-2012 period examined, the market price of GHGs, indicated by the solid line (right axis) in Chart 2, fell from a high of -$298 per tonne for large emitting manufacturers in 2004 to about -$422 per tonne in 2015.^Note This negative price indicates that, in 2015, the cost of reducing GHG emissions by one tonne would be equal to reducing production by $422 worth of desirable output. In other words, the negative price of GHGs reflects a trade-off in which reducing undesirable output means that desirable output must also be reduced proportionately.^Note

While the modelling of an estimated market price of GHGs is helpful, there are three reasons to interpret these findings with some caution. First, the price of GHGs for the manufacturing sector does not apply to the whole economy. The manufacturing sector is generally more pollution-intensive than other sectors, especially the services sector. Second, the data used to create price estimates included only businesses that emitted 100,000 tonnes of GHGs or more annually. This means that the businesses that are included in the dataset are typically larger than the average manufacturer, and likely more emissions-intensive.^Note Therefore, the price estimates in the study may not reflect the price of GHGs for all other manufacturers. Third, the prices for undesirable outputs derived in the study reflect the cost of reducing emissions for producers. They are not the social prices or costs of undesirable outputs, which would also account for the impact of undesirable outputs on public institutions and infrastructure, social justice, and the health and income of individuals.

Conclusion

From 2004 to 2012, the decline in the intensity of GHG emissions among the largest emitters in the manufacturing sector was the main reason that EAMFP growth outpaced MFP growth. A decline in GHG emission intensity was also the primary driver behind the falling price of GHGs. From a business perspective, the market price of GHGs represents the cost of reducing emissions, which increased from $298 per tonne of GHG emissions in 2004 to $390 per tonne in 2012.

References

Baldwin, J.R., W. Gu, R. Macdonald, and B. Yan. 2014. What Is Productivity? How Is It Measured? What Has Canada’s Performance Been over the Period 1961 to 2012? The Canadian Productivity Review, no. 38. Statistics Canada Catalogue no. 15-206-X. Ottawa: Statistics Canada.

Baldwin, J.R., D. Leung, and L. Rispoli. 2014. Canada-United States Labour Productivity Gap Across Firm Size Classes. The Canadian Productivity Review, no. 33. Statistics Canada Catalogue no. 15-206-X. Ottawa: Statistics Canada.

Brandt, N., P. Schreyer, and V. Zipperer. 2014. Productivity Measurement with Natural Capital and Bad Outputs. OECD Economics Department Working Papers, no. 1154. Paris: OECD Publishing.

Dang, T., and A. Mourougane. 2014. Estimating Shadow Prices of Pollution in OECD Economies. OECD Green Growth Papers, no. 2014-02. Paris: OECD Publishing.

Gu, W., J. Hussain, and M. Willox. 2019. Environmentally Adjusted Multifactor Productivity Growth for the Canadian Manufacturing Sector. Analytical Studies Branch Research Paper Series, no. 425. Statistics Canada Catalogue no. 11F0019M. Ottawa: Statistics Canada.

OECD (Organisation for Economic Co-operation and Development). 2001. Measuring Productivity—OECD Manual: Measurement of Aggregate and Industry-Level Productivity Growth. Paris: OECD Publishing.

Statistics Canada, n.d.a. Table 36-10-0217 Multifactor productivity, gross output, value-added, capital, labour and intermediate inputs at a detailed industry level. Available at: https://www150.statcan.gc.ca/t1/tbl1/en/tv-action?pid=3610021701 (accessed January 29, 2019).

Statistics Canada, n.d.b. Table 38-10-0097 Physical flow account for greenhouse gas emissions. Available at: https://www150.statcan.gc.ca/t1/tbl1/en/tv-action?pid=3810009701 (accessed January 29, 2019).