The global economy's transition, marked by shifts in energy systems, the COVID-19 pandemic, geopolitical changes, and an increased focus on sustainability, necessitates a more comprehensive approach to measuring economic growth. Traditional national income and product accounts (NIPAs), such as GDP, are insufficient because they omit the value of natural resources and the costs of pollution. This paper addresses this gap by integrating monetary damages from pollution into the NIPAs, using a framework that defines sustainable growth as non-negative capital formation, encompassing both man-made and natural capital. The study focuses on two key pollutants: fine particulate matter (PM2.5) and carbon dioxide (CO2), tracking their monetary damages across 165 countries from 1998 to 2018. Monetization is crucial as it allows for direct inclusion of environmental costs in economic accounts, aggregation across different pollutants, and captures societal preferences changes regarding environmental quality and health risks.

The paper draws upon existing literature on environmental accounting, sustainable growth, and the valuation of pollution damages. It leverages previous research on the social cost of carbon (SCC) to monetize CO2 emissions and integrates methods for estimating the monetary damages from PM2.5-related mortality risk. The study cites several studies that have examined the benefits and costs of clean air acts and the economic valuation of statistical life (VSL), providing a foundation for the chosen methodologies. It also references literature exploring the Environmental Kuznets Curve (EKC) and its relationship to economic development and pollution. The authors acknowledge limitations in previous approaches, particularly the lack of comprehensive monetization of environmental impacts beyond PM2.5 and CO2, which informs their selection of these two key pollutants as a starting point for creating more complete accounts.

The study assembles a global database of PM2.5 concentrations and CO2 emissions for 165 countries (1998-2018). Monetary damages (Gross External Damages or GED) are estimated using established methods. For CO2, the SCC, representing the marginal damage per ton, is utilized, with estimates from the US government's Interagency Working Group (IWG) study. The temporal variation in the SCC reflects the accumulating stock of atmospheric carbon. For PM2.5, damages are calculated based on mortality risks from exposure, utilizing the integrated exposure response (IER) function and country-specific VSL values. VSL values are initially estimated for the U.S. and then extrapolated to other countries based on income-VSL elasticities from the literature. These damages are then deducted from GDP to calculate the environmentally-adjusted value added (EVA), a more comprehensive measure of economic growth that incorporates the external costs of pollution. The analysis explores various income groupings to discern trends in pollution damage intensity across different development stages. Sensitivity analyses are conducted by varying key parameters such as the VSL and SCC to assess the robustness of findings. The study employs decomposition analysis to examine the relative roles of pollution concentrations and income growth in driving PM2.5 damages. An EKC analysis is performed to explore the relationship between per capita income and both the physical measures of pollution and the monetary damages.

The study's key findings include: 1. Globally, pollution damage intensity decreased until the Great Recession, then increased. This shift is attributed to growing shares of global GDP from pollution-intensive developing economies, particularly China and India. 2. High-income countries experienced declining pollution damage intensity, while middle-income countries showed sharp increases, driven largely by capital investment and changes in consumption shares. 3. The decomposition analysis reveals that in rapidly developing economies like China and India, rising incomes and their impact on VSL are the primary drivers of increased PM2.5 damages, surpassing the effect of rising concentrations. 4. The EKC analysis shows that monetary damages from both PM2.5 and CO2 peak at higher income levels than their physical measures. Globally, few countries have reached peak pollution damage; therefore, rising damages are likely in the coming years. 5. PM2.5 damages peak earlier in the development path than CO2 damages, likely due to differences in the timing of pollution control policies targeting these pollutants. The sensitivity analysis demonstrates that the results are robust, although varying the VSL and SCC significantly impacts the magnitude of pollution damage estimations.

The findings highlight the limitations of relying solely on traditional GDP growth measures in assessing sustainable development. By integrating monetary damages from pollution, the study presents a more accurate and comprehensive picture of economic growth. The observed divergence between the trends of physical pollution measures and monetary damages emphasizes the importance of incorporating societal preferences and changing willingness-to-pay for environmental quality and health risk reductions in evaluating sustainability. The EKC analysis reinforces the conclusion that rising pollution damages are likely in many developing countries, emphasizing the urgent need for more holistic approaches to economic growth that account for the environmental costs of economic activity. The variation in pollution damage intensity across income groups underscores the need for tailored policies reflecting varying levels of economic development and the need for stringent pollution control measures in developing economies experiencing rapid economic growth.

This paper advocates for augmenting national income and product accounts with monetary pollution damage estimates to better track sustainable growth. The study's main contributions are: (1) demonstrating a shift in global pollution intensity after the Great Recession, driven by developing economies; (2) revealing the dominant role of rising incomes and VSL in driving pollution damages in rapidly developing countries; and (3) showcasing the divergence between physical measures and monetary damages in the EKC. The findings highlight the need for comprehensive accounting of environmental costs and tailored policies to achieve sustainable growth. Future research should extend this approach to encompass other pollutants and environmental impacts for a more holistic assessment.

The study acknowledges limitations stemming from data availability, particularly the exclusion of water pollution, ecosystem services, and other pollutants. The truncation of the analysis at 2018 due to data limitations on mortality rates potentially underestimates the impact of the COVID-19 pandemic on pollution damage. The reliance on income-VSL elasticities from existing literature introduces uncertainties in extrapolating VSL values across countries and over time. The chosen methodologies for monetizing CO2 and PM2.5 damages, while widely accepted, are still subject to ongoing scientific refinements and uncertainties. The study focuses mainly on mortality risk associated with PM2.5, neglecting other significant health and productivity impacts.