The US and Europe have experienced sluggish productivity growth in the past two decades. Economists and policymakers often express concern about this trend by citing total factor productivity, which measures an economy’s capacity to generate income from inputs and, in advanced economies, is widely seen as the main long-term driver of changes in living standards. Yet total factor productivity does not account for all the shifts in future consumption that will arise from production today.
This working paper sets out a new approach to measuring productivity that adjusts for the effects of declining carbon emissions on future consumption. The authors show how prospective emissions reductions could have a significant impact on productivity and, accordingly, should inform policymakers’ efforts to balance climate policy with more conventional efforts to promote economic growth.
Key points for decision-makers
- Emissions have been falling in many advanced economies in recent decades.
- These emissions reductions affect productivity because they limit climate-related economic damage and thereby expand future consumption possibilities.
- Policymakers should account for emissions-adjusted total factor productivity (TFPE) in decisions on economic growth, adopting a productivity index that rises when emissions decline.
- Prospective emissions reductions could have significant effects on TFPE.
- For example, on a pathway to net zero by 2050 and at a carbon price of US$250 per tonne, TFPE growth in the US would be nearly double that of conventional total factor productivity growth between 2025 and 2035.
- Therefore, TFPE helps capture improvements in the economy’s capacity to generate income from its inputs.
- TFPE provides a simple way to express the benefits of decarbonisation in terms comparable to those used to evaluate traditional growth-enhancing policies.
DOI: doi.org/10.21953/researchonline.lse.ac.uk.00140962