Green and traditional productivity growth with natural capital: The role of resource depletion, environmental damages and sectoral composition

This study estimates traditional and green productivity growth, including natural capital as an input. The key novelty is the use of an alternative output measure (instead of GDP) that accounts for the depreciation of produced capital, depletion of natural resources, and environmental damages to estimate green productivity growth. The study also examines the effects of disregarding capital losses and ecological damages and the role of sectoral composition in differences between the two productivity measures. In doing so, we apply the translog-stochastic production frontier models in a panel of 100 countries from 1999 to 2018. Among our sample countries, only 46 percent had good compliance with the sustainability path; and the average share of capital losses and environmental damages in actual GDP is about 18 percent. Our findings also indicate a decline in global and regional average green productivity growth over the study period. Ignoring the loss of capital stocks and environmental costs of the economy tends to overestimate traditional productivity growth by 0.8–1.6 percent. Sectoral composition plays a crucial role, as tertiarization closes the gap between traditional and green productivity growth while industrialization widens the gap. Overall, countries should actively foster green practices, technologies, and policies to improve green productivity.