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pollution and limit the accumulation of environmental liabilities drives the economy in a more efficient direction.

Second, resource pricing is important not just for the pricing of natural capital and services, but also for pricing of all the other inputs within an economy. An economy allocates its efforts and expenditures according to relative prices, and under-priced resources result in unbalanced economies. Policy makers should be targeting the future they wish their economies to achieve, and this will usually require higher relative prices on resources. An economy that wishes to develop around knowledge, R&D, human capital and innovation should not be providing free natural resources.

Third, employing resource pricing drives investments into R&D and innovation. It does so because avoiding costly resources can be accomplished by researching and finding new production methods. This will include investment in all of the factors (human capital and knowledge) and all of the activities (R&D and innovation) listed above. Moving towards more efficient resource pricing is about turning the economy’s emphasis towards different foundations of development.

Fourth, these investments may then generate

innovation rents. Policies that reflect scarcities that are prevalent in the local economy can also reflect scarcities prevalent more widely. For this reason, a solution to a problem of resource scarcity identified locally (via R&D investments) may have applicability and hence more global marketability. The first solution to a widely experienced problem can be patented, licensed and marketed widely.

Fifth, aggressive environmental regulation may anticipate future widely-experienced scarcities and provide a template for other jurisdictions to follow. Such policy leadership can be the first step in the process of innovation, investment, regulation and resource pricing described above (Network of Heads of European Environment Protection Agencies 2005).

In sum, the benefits from a strong policy framework to address market failures and ecological scarcities will flow down the environment pathway that comes from altering the direction of an economy. Policies and market-based mechanisms that enhance perceived resource prices creates incentives to shift the economy onto a completely different foundation – one based more on investments in innovation and its inputs of human capital, knowledge, and research and development.

How to measure progress towards a green economy It is difficult, if not impossible, to manage what is not measured. Notwithstanding the complexity of an overall transition to a green economy, appropriate indicators at

both a macroeconomic level and a sectoral level will be essential to informing and guiding the transition.

To complicate matters, conventional economic indicators, such as GDP, provide a distorted lens for economic performance, particularly because such measures fail to reflect the extent to which production and consumption activities may be drawing down natural capital. By either depleting natural resources or degrading the ability of ecosystems to deliver economic benefits, in terms of provisioning, regulating or cultural services, economic activity is often based on the depreciation of natural capital.

Ideally, changes in stocks of natural capital would be evaluated in monetary terms and incorporated into national accounts. This is being pursued in the ongoing development of the System of Environmental and Economic Accounting (SEEA) by the UN Statistical Division, and the World Bank’s adjusted net national savings methods (World Bank 2006). The wider use of such measures would provide a better indication of the real level and viability of growth in income and employment. Green Accounting or Inclusive Wealth Accounting are available frameworks that are expected to be adopted by a few nations5

initially and pave the

way for measuring the transition to a green economy at the macroeconomic level.

How might a green economy perform over time? In this report, the macroeconomic Threshold 21 (T21) model is used to explore the impacts of investments in greening the economy against investments in business as usual. The T21 model measures results in terms of traditional GDP as well as its affects on employment, resource intensity, emissions, and ecological impacts.6

The T21 model was developed to analyse strategies for medium to long-term development and poverty reduction, most often at the national level, complementing other tools for analysing short-term impacts of policies and programmes. The model is particularly suited to analysing the impacts of investment plans, covering both public and private commitments. The global version of T21 used for purposes of this report models the world economy as a whole to capture the key relationships between production and key natural resource stocks at an aggregate level.

The T21 model reflects the dependence of economic production on the traditional inputs of labour and physical capital, as well as stocks of natural capital in the form of

5. World Bank, together with UNEP and other partners, have recently (at Nagoya, CBD COP-10, October 2009) announced a global project on Ecosystem Valuation and Wealth Accounting which will enable a group of developing and developed nations to test this framework and evolve a set of pilot national accounts that are better able to reflect and measure sustainability concerns.

6. See the Modelling chapter for details on the T21 model. 23

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