Beyond Gross Domestic Product: including nature in economic policy assessment

The supply of ecosystem services, such as crop pollination and water purification, are of great importance to any economy, both directly and indirectly. However, most assessments use Gross Domestic Product (GDP) as the main economic development indicator. GDP shows the total value of output/income generated in a country, but it does not capture fully the contributions of nature to economic activity. The concept of Gross Ecosystem Product (GEP), which summarises the value that ecosystem services provide to the economy in monetary terms, is a way to overcome these shortcomings in policy assessments. It also allows assessing the impact of particular policies on the overall condition of ecosystems.

A JRC study shows the importance of adding nature’s value 

The Gross Ecosystem Product in Macroeconomic Modelling report explains and showcases how GEP can be applied in macroeconomic analyses alongside the traditional GDP indicator. The application of GEP to assess the value of ecosystem services in the decision-making process could enhance the quality of new policies and stewardship, which in turn could improve the management of natural capital. 

Real-world policy implementations of GEP as a metric alongside GDP are still pending due to various reasons, including technical limitations related to data availability and the complexity of ecosystem service valuation resulting in large uncertainties of estimates. However, preliminary simulations using the INCA (Integrated Natural Capital Accounting) approach and data show that the inclusion of GEP can alter the outcome of evaluations significantly, offering a more nuanced and realistic picture of the value of ecosystem services. 

For example, JRC researchers simulated a scenario in which changes in consumer preferences lead to a gradual increase in the consumption of proteins of plant origin. GDP would record a positive, yet very small, economic impact: an increase of 0.01% in the EU in 2030 compared to the reference scenario. In contrast, the GEP index would increase by 1.5%: this corresponds to 2.3 billion euros, a significant economic impact that GDP missed almost entirely.

A fruitful collaboration

The report is the result of a cooperation between scientists from the JRC and Wageningen Economic Research (WEcR), who develop and operate a macroeconomic model called MAGNET. Compared to other models used to assess the impact of policies on the economy, MAGNET was the most fitting option due to its built-in ability to represent land supply and forestry. JRC researchers introduced the new GEP module to MAGNET, which allows comparing the impact of different policies on both GDP and GEP in the European Union. The GEP module uses the INCA dataset, developed and maintained by the JRC, to incorporate the value of ecosystem services. This dataset is a product of the INCA project, which follows the System of Environmental Economic Accounting (SEEA) global framework. Adhering to this international standard ensures the credibility of the GEP module.

The development of the GEP module is an ongoing process: JRC researchers are working on ways to make it even more accurate and effective. For example, connecting it to larger and more detailed data sets could lead to better specification of the ecosystem services supply functions and to the inclusion of more types of ecosystem services in the GEP indicator. Enriching GEP accounting with perspectives on the link between biological and human production, or considering harm to the ecosystem carrying capacity, may also contribute to make the model more accurate.