What is GEP, the alternative to GDP that has taken off in China?

Key Points

• There’s a new way of measuring growth. In China, gross ecosystem product or GEP, is taking off.
• GEP takes into account the benefits that forests, mangroves and other natural capital assets provide, and puts them into a single measure.
• Experts argue that using GEP instead of GDP can help value ecosystems and potentially be used in developing countries that want to preserve their ecosystems.

“GDP is not enough,” declared UN chief Antonio Guterres at the recent launch of a report by an expert group recommending alternatives to the world’s prevailing measure of economic success.

“In my time as secretary-general, the size of the global economy has risen over 50%, adjusting for inflation. But our world has not seen commensurate improvements in many of the areas that benefit humanity,” he said.

Amid the UN’s efforts to advance the uptake of more equitable and sustainable development metrics, a new, greener alternative indicator to GDP has quietly gained ground in China, the second-largest economy.

China’s GDP limits

While it is now inconceivable to talk about China’s development without referencing GDP, the country was, in fact, the last major holdout to adopt the ubiquitous measure of economic performance in 1993.

Since then, GDP has become deeply ingrained in national policymaking – heavily influencing the promotion of local cadres.

However, decades of fast-paced economic growth have come at a huge ecological cost, prompting the government to strengthen formerly lax environmental regulations through production curbs and a green industrial push.

Now China’s phenomenal development seems to be reaching its limit, with GDP stagnating in recent years and leading to a lowered growth forecast in its latest annual political meetings.

As a result, the industrial powerhouse is experimenting with a new measurement known as the gross ecosystem product (GEP). This calculation puts a value on nature’s contribution to humanity’s well-being to create a more comprehensive picture of a nation’s wealth.

What is wrong with GDP?

GDP – which captures all economic production by individuals, companies and the government in a single measure – was invented in the 1930s to help manage production during the Great Depression.

Despite its own creator, economist Simon Kuznets, explicitly warning that national welfare “can scarcely be inferred” from it, the indicator became the standard tool for sizing up a country’s economy following the Bretton Woods conference in 1944.

“GDP was created to solve immediate problems. It came out of national economic accounting to address war fighting,” said Tong Wu, a senior scientist at Stanford University’s Natural Capital Project, whose research focuses on the development of GEP.

“GDP wasn’t invented to be a long-term, all-encompassing metric of economic health, much less of human well-being”.

The outcome is a world where governments optimise for a figure that renders important things invisible, meaning that a rise in GDP increasingly fails to correlate with an improved sense of human well-being, Wu told Green Central Banking.

For instance, GDP actually goes up when there is an oil spill, despite it causing irreversible damage to the ecosystem, he said.

“It completely misses the fact that the country has permanently destroyed a vital economic asset that provided water regulation, soil stability, and climate resilience – leaving it increasingly vulnerable to future economic shocks”.

Ulrich Volz, professor of economics and director of the Centre for Sustainable Finance at SOAS University of London, told Green Central Banking that traditional economic models typically fail to capture ecosystem collapse scenarios, which are necessary to provide a full picture of sovereign debt sustainability risks.

A traditional debt sustainability analysis, for example, might erroneously conclude that a country’s ability to service debt has improved after cutting down a pristine rainforest for timber, since its GDP has gone up in the short term, said Volz, who co-published a study looking into integrating nature into debt sustainability analysis in 2022.

These perverse outcomes are a result of applying Keynesian theory to the environment, said Wu, referencing the economist John Maynard Keynes’ famous quip that “the government should pay people to dig holes in the ground and fill them up” to stimulate the economy during a downturn.

GDP’s limitations as a broad measure of progress – from its exclusion of unpaid care work and inequality to environmental destruction – are widely recognised today.

But past attempts to dethrone GDP as the global yardstick of success have struggled to gain political traction, given “the intuitive appeal of a single, simple, well-established indicator,” stated the UN’s Beyond GDP report.

“I call it the Lord of the Rings effect – we always look for the one indicator to rule everything,” said Wu. “We need indicators to capture the multi-dimensionality of development, as opposed to trying to reduce our efforts to a single ‘GDP go up’ button that all the policymakers like to push”.

“A single-minded focus on GDP is like driving a car with only one dial on your dashboard. You don’t know what your fuel level or what gear you are in. It’s not a way to run an economy”.

Instead, Volz suggests linking macroeconomic models with science to account for ecosystem service provisions. Such models can then be used to gauge the macroeconomic consequences of nature loss in debt sustainability analysis, he added.

What is GEP?

Modelled after GDP, gross ecosystem product or GEP distils complex data points about the benefits that forests, mangroves and other natural capital assets provide, such as carbon sequestration or water purification, into a single measure of value that quantifies nature’s contribution to human well-being.

“It takes some strategic inspiration from GDP by saying, we have this one indicator that captures a bunch of diverse things. It’s not a perfect instrument by any means, but if you use this alongside other familiar indicators, like GDP, it’s like adding another dial to your car,” said Wu.

The metric – first adopted by the city of Shenzhen in 2014 – was developed by a group of Chinese and European scientists alongside Wu’s team at Natural Capital Alliance, a Stanford University-based global collaboration that is working to value nature in economic models

In 2021, Shenzhen claimed it established China’s first complete accounting system for GEP, which valued the technological hub’s ecosystem services at 130.38bn yuan (US$20.36bn).

There have been signs of early success using GEP alongside GDP for urban planning, with the land-starved city designating nearly half of its land for nature and setting a goal of growing GDP while maintaining its GEP.

Many local governments in China have since piloted GEP accounting systems to incentivise ecological protection to varying degrees. Some officials are already being judged not only on their ability to meet GDP targets – which often comes at the expense of natural capital assets – but GEP targets as well.

“Things have just exploded… you can’t find a single province that hasn’t used GEP,” said Wu, adding that he expects a national GEP number to be officially endorsed at some point.

“This has systematically changed a lot of behaviour and decision making. People will now think twice before they decide to turn a mangrove into a car park, for instance”.

How GEP is being used in China

China previously trialled “green GDP” – an indicator which simply subtracts the cost of environmental destruction from GDP – over two decades ago.

But unlike green GDP, which will always be lower than GDP, GEP captures the invisible value that ecosystem services provide, which can incentivise businesspeople and policymakers to invest in them to create new jobs and income, said Wu.

In Beijing, GEP is being used to improve existing eco-compensation mechanisms, such as for the “paddy-to-dry” programme in the Miyun Reservoir Basin, which compensates farmers whose paddy fields were converted to dry land to conserve more water for the city in 2003.

“With GEP, we capture all those benefits,” explained Wu. “If the GEP value of your land goes up, you’ll be compensated for that because you’re providing economically valuable public goods to Beijing”.

Other regions have also established so-called “two mountain banks”, where GEP accounting is used to issue “GEP loans” using future GEP revenues – such as from payment for ecosystem services or water and soil conservation – as collateral. These loans have low interest rates and relatively fast approvals by commercial banks.

The number of GEP loans in Lishui, a city located in eastern China’s Zhejiang province, for instance, exceeded 19bn yuan (US$2.9bn) in 2020 alone – making it one of the most effective natural capital financing programmes in the world.

Adoption of GEP elsewhere

Increasingly, the indicator is being used to raise financing through GEP-linked bonds, insurance products and debt restructuring.

“We’re just in the early stages of this phase, but it has potential to be the most exciting and most widely adoptable – not just in China, but elsewhere,” said Wu.

His organisation, the Natural Capital Alliance, is currently working with the London School of Economics, The Nature Conservancy and the World Bank’s International Finance Corporation to explore incorporating GEP into debt sustainability analysis.

This could help countries that are conserving their ecosystems, as their debt carrying capacity would be enhanced, said Volz. However, he cautioned that this approach might make countries where ecosystems are being depleted look more vulnerable.

Outside of China, Wu’s team has been in talks with governments across South and Southeast Asia, as well as Latin America, to drive GEP adoption. That includes Chile, Colombia, Indonesia, India and the Philippines – all climate-vulnerable countries with debt constraints that are relatively rich in natural capital.

“For them, finance and climate are tightly linked… because climate change increases your debt burdens and inability to service debt deprives you of the resources to address climate change,” said Wu.

Much of the discourse in these countries has focused on debt-for-nature swaps, where a small amount of debt is forgiven in exchange for protecting a certain amount of land or sea area. But a “more rational” way of debt restructuring is to assign proper value to a country’s natural capital using GEP so that it is used as collateral to negotiate more favourable repayment terms, said Wu.

Akim Daouda, former head of Gabon’s sovereign wealth fund, previously suggested that applying this strategy in African countries – where natural capital is valued at over US$6tn – could reshape global finance.

“Debt negotiations, investment decisions, and credit ratings would look different if natural capital was properly valued. Instead of being forced to extract resources for revenue, countries could use ecosystem services as financial leverage,” wrote Daouda.

Wu and his team have also talked with multilateral development banks and private financial institutions about issuing the world’s first GEP-linked bond, which would allow sovereigns and corporations to raise capital for conservation by meeting their targeted GEP growth figures. However, poor sovereign credit ratings – or in the case of one of the countries, a lack of one – have been a key challenge, and the discussions are still in early stages.

Nonetheless, Wu believes that in a world where cryptocurrency, which is not backed by any underlying tangible assets, has become widely accepted by policymakers and financiers as a store of financial value, there is no reason natural capital should not be too.

“It should be much easier for us to convince people that the Amazon, which provides all these essential services to the world and to local communities, is valuable,” said Wu.

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