Since the mid-2000s, productivity growth in many advanced economies has slumped compared with previous decades. In the United States, for example, growth has averaged around 0.5% per year over the past two decades – it was 1.5% between 1990 and 2005 (see Figure 1a). The slowdown has been even more pronounced in Europe.
Given that productivity accounts for approximately 80% of income growth in advanced economies, this sluggish performance has raised serious concerns among both researchers and policy-makers.
But standard productivity statistics don’t take account of the fact that economies have become less reliant on emissions of carbon dioxide in recent years. Although emissions generally remain too high to meet climate goals, they have dropped significantly since the mid-2000s in many countries.
For example, in the United States, the absolute level of carbon emissions fell by 23% between 2005 and 2024 (see Figure 1b) and the ratio of carbon emissions to GDP decreased by 40%. It’s a similar story for emissions from domestic production, and for consumption-based emissions, which take account of rising international trade and imported emissions from countries such as China.
Figure 1: Productivity growth and US carbon emissions
Source: De Ridder and Rachel (2025)
Under the standard measure for productivity, an efficiency improvement that also reduces carbon emissions will not be picked up. This because emissions levels affect neither measured inputs nor measured output.
But lower carbon emissions today prevent future climate damages. Recent estimates suggest that these damages are very large: a metric tonne of carbon emissions, which is roughly the amount associated with a one-way economy flight from London to New York, does around $1,300 of damage to ‘the present value to future consumption’.
So, how should we adjust productivity statistics to capture the fact that production now comes with lower carbon emissions?
Emissions-adjusted total factor productivity
In our research, we propose a way to adjust productivity growth to account for changes in carbon emissions. Our metric – ‘emissions-adjusted total factor productivity’ (or TFPE) – measures how efficiently the economy transforms inputs into the present value of consumption, accounting for the negative impact of carbon emissions on future output and factor accumulation. By contrast, the traditional metric of total factor productivity (TFP) measures ‘only’ how efficiently inputs are converted into current output: harmful emissions aren’t part of the story.
Even so, TFPE and TFP are actually closer than it first seems. Both relate inputs today to the present value of consumption. For TFP, that is because current output consists of both consumption and investment, with the latter enabling future consumption. The theory goes that if ‘investment goods’ are competitively priced, then their prices will reflect the present value of the future consumption that they enable. This is why aggregate output is a welfare-relevant indicator of economic activity.
TFPE expands the way in which economists can measure productivity by taking into account the negative effects of emissions on output. It is straightforward to calculate and only requires data on aggregate output, carbon emissions, TFP and an estimate of the social cost of carbon. Taken together, these metrics allow us to evaluate the future costs of present decisions.
Figure 2: Productivity growth in the United States (five-year moving average)
Source: De Ridder and Rachel (2025)
No slowdown in US TFPE growth
The social cost of carbon directly affects TFPE estimates. For low social costs, TFPE approximately equals TFP. This has a natural interpretation: if the social cost of carbon is small, the benefits of an increase in (traditionally measured) productivity dominates the negative effects of carbon-induced climate change.
This is particularly the case if the social cost is measured without taking the global damages from domestic emissions into account. This ‘domestic’ cost of carbon is not usually used for climate policy analysis, although US policy during the first Trump administration is a notable exception.
In our work, we present estimates of TFPE for two values of the social cost of carbon. Both values take global climate damages into account. The first value is $252 in 2017 US dollars per metric tonne of carbon, taken from a meta-analysis published in 2024. The second value is $923, which is taken from recent research that explores the relationship between global average temperatures on economic activity. Data on output and TFP come from the Penn World Table and consumption-based carbon emissions are from the Global Carbon Project.
Has there been a slowdown of growth once emissions are taken into account? The path of US TFPE growth is plotted in Figure 2.
The chart shows the well-known abrupt slowdown of productivity growth in the mid-2000s when measured through TFP. But adjusted for emissions, the slowdown is less extreme. For the lower social cost of carbon (red-dashed lines), the chart already shows that growth in the 1990s was lower than standard metrics suggests. This is because carbon intensity was rising over those years. The opposite happens after 2005: TFPE growth exceeds TFP growth, because emissions fell.
For the higher estimates of the social cost of carbon (green solid lines), the reduction in emissions causes a rise in productivity growth that is large enough to undo the entire slowdown of the mid-2000s. If anything, productivity growth accelerates over the past 20 years.
The recent high estimates of the social cost of carbon that underlie these calculations are clearly outliers, and the debate on what the true costs are is likely to continue over the years to come. Even so, it is worth stressing that even these high estimates of the cost of carbon only focus on narrow economic costs to consumption.
For example, changes in broadly defined welfare by factors such as higher migration or old-age mortality are not considered. If these non-consumption costs of climate change are included in the definition of TFPE, the resulting social cost of carbon is high even if the economic costs are more modest.
Adjusting productivity for emissions also changes cross-country patterns. While most European economies have paths of emissions that look a lot like the United States, the path of emissions in countries like China and South Korea is very different. While their emissions intensity has fallen recently, these countries saw rapid increases in emissions between 2000 and 2020. The future climate damages associated with these emissions are so large that TFPE growth in both countries was negative for most of the past decade.
Conclusion
The framework that we use to calculate TFPE can be readily extended to other variables that also affect future output. For example, because of the spillovers from investments into research and development (R&D), they are likely to have (much) greater positive effects than their prices in the national accounts imply. The same is true of things like human capital accumulation. Quantifying the path of productivity while accounting for such variables is an exciting avenue for future work.
