Climate change and its impact on GDP

- Economies will adopt new mechanisms due to climate change, thereby changing the nature of mitigation measures

GDP also does not take into account the environmental damage caused by economic activities. The impacts on people facing climate change are also beyond its scope. Ironically, cutting down trees increases GDP. The same thing happens after replanting. But this may cause GDP to lose some of its current quality. Given the growing efforts to curb carbon emissions and climate change, huge investments are being made to build renewable energy capabilities, pushing electric vehicles.

In some countries, coal-fired power plants are being closed down and renewable energy is being emphasized. The load on petrol and diesel cars is decreasing. Soon their number will begin to decrease and the road will be paved for electric vehicles. Over the next decade, many large traditional industries will begin to go out of trend. In such turbulent times GDP can be misleading. Churn can only be understood by NDP (net domestic product i.e. GDP minus depreciation).

If coal-fired power stations are replaced with wind or solar power plants, the net increase in economic activity estimated by the NDP will include the cancellation of coal-fired plants, while the GDP figure will be misleading because it only includes solar power. Depreciation has already become significant as economies increase in productive assets. The gap between India's GDP and NDP was a little over 6 percent in the fourth quarter of the last century. Now it has become about 12 percent. The gap between the two steps should widen as efforts to curb carbon emissions increase.

This is because carbon-intensive production facilities will be replaced by cleaner alternatives. For example, the Railways is still adding new diesel locomotives to its fleet. However, Railways is electrifying all its routes. Recording these and other such changes will not capture the full depreciation that needs to be captured because normal macroeconomic data can capture the depreciation of manufactured capital, but it does not capture the depreciation of natural capital such as water resources, forest resources, clean Water, and natural resources.

India's groundwater levels have been declining for decades, creating a crisis in agricultural states. Air pollution is affecting people's health. Rising temperatures in the Gangetic Plain will affect people's health. The dams being built in the Himalayas are damaging the environment. Joshimath is an example. In 2021, two dams under construction were washed away.

Dealing with these issues and bringing about industrial transformation will require massive change. One consequence of this may be an increase in capital-output estimates. A higher capital-output ratio means slower growth. In such a scenario, GDP remains less reliable as a key driver of economic activity.