Fossil fuel nations to see value of their economies shrink under new UN-agreed measure

Government statisticians have endorsed a new measure of the size of national economies, tackling statistical quirks that led to the contribution of fossil fuels being overstated and that of renewables being undercounted.

At the UN Statistical Commission’s annual session in New York last month, all governments decided that net domestic product (NDP) – as opposed to gross domestic product (GDP) – “will be identified as the conceptually preferred measure of economic growth”. They agreed to try and implement these changes through their national statistics offices and central banks by 2029-2030.

One key difference, which could support climate action, is that NDP includes the depletion of non-renewable natural resources like coal, oil and gas as a cost of production, shrinking their value in the calculation.

Bram Edens, a statistician with the Organisation for Economic Co-operation and Development (OECD), explained that accounting for how reserves of fossil fuels are used up will reduce their value in the same way that the value of buildings or machinery falls due to the wear and tear they suffer over time.

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During a webinar to explain the change, the International Monetary Fund’s chief statistician Bert Kroese said that most countries NDPs are 10-20% lower than their GDPs.

The additional requirement to account for resources depletion, he noted, would reduce most countries’ NDPs by only a “relatively small” amount, but “will have a greater impact on countries which depend heavily on mining and mineral extraction” such as Norway, Russia and Saudi Arabia whose NDPs would shrink on paper by another 10-20%.

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Pushpam Kumar, an economics expert with the United Nations Environment Programme, told Climate Home that GDP figures overstate the benefits to the economy of having and extracting fossil fuels, and that the updated NDP measure would fix this “to some extent”.

With fossil fuels set to contribute less to statistics on economic growth and the size of an economy, Kumar said this would be a consideration for governments, giving them less incentive to explore for and extract fossil fuels on their territory.

However, it will be up to each government to reform their own systems – and some fossil fuel-reliant countries resisted the changes at the UN talks.

Resistance to changes

In its official feedback, the government of Kuwait – which gets two-thirds of its GDP from oil and gas – called for “flexibility in the application to ensure it adapts to the economic characteristics of each country, especially the Gulf Cooperation Council countries, such as the inclusion of the unconventional energy sector in the calculations”. While it did not specify what “unconventional energy” refers to, this is likely to mean renewables.

According to an official annotated document published by the UN, the government of Iran – which gets a third of its GDP from oil and gas – suggested watering down the gathering’s conclusions from “recommends” a shift to NDP to “invites” and adding caveats like “as appropriate”.

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Arguing in favour of the change, Pacific island nation Fiji said it would ensure that “national accounts better reflect contemporary economic realities and provide a stronger foundation for policy-making and economic analysis worldwide”.

The 600 government statisticians gathered in New York also agreed to explicitly include renewable energy resources for the first time in national accounts. “What we’re really trying to do is to value the renewable energy resource that is essentially being provided for free by nature – that is being exploited through the use of solar panels and wind turbines and so on,” the OECD’s Edens explained.

Hydro boost for Brazil and Canada

This is likely to boost – on paper – economies that get a lot of energy from solar, wind and hydropower. A 2021 World Bank report on the changing wealth of nations estimates that Brazil and Canada, for example, have hydro-electric assets worth hundreds of billions of dollars. But, Edens noted, the new accounting approach will not boost the economies of countries with lots of sun and wind unless they have the solar panels and wind turbines to turn those resources into energy.

Another flaw in GDP, he said, is that “if you have a forest, you can boost your GDP by over-harvesting this forest but at some point, the forest will no longer be there”.

The changes introduced with NDP will address this by including the cost of depleting natural resources like forests or fish. This way “you send the better signal that the current level of economic growth cannot continue forever”, Edens explained.

Kumar noted that wear and tear of machinery cuts its value in national accounts but the destruction of natural capital – like forests, fisheries, water and clean air – has previously not lowered their value on paper.

Despite the shift, he warned that changes to statistical methods would not automatically influence government policies. “Accounting does not translate into policy until the analysts and decision-makers take note of that and change the course of action,” he said.

Nonetheless, all governments agreed to September 2024’s UN Pact for the Future, which included a commitment to develop “a framework on measures of progress on sustainable development to complement and go beyond [GDP]”.

Kumar said the reforms should go further and resources are needed to implement them. But, he added, “one thing is for sure: countries are showing interest. They have realised that this GDP alone will not do good for their country.”