Abstract
Conventional productivity measures, such as Total Factor Productivity (TFP), typically exclude natural capital inputs and environmental pressures, potentially providing an incomplete assessment of economic performance. This paper develops an Environmentally Adjusted Multifactor Productivity (EAMFP) index within a Törnqvist growth accounting framework that incorporates renewable and non-renewable natural capital and adjusts output for CO₂ emissions. Moving beyond the predominantly country-level focus of previous EAMFP applications, we examine seven world macro-regions over the period 1995–2020 and compare conventional and environmentally adjusted productivity trajectories. The results reveal substantial regional heterogeneity. East Asia & Pacific and South Asia show strong productivity growth but weaker environmental performance, whereas Europe & Central Asia and North America exhibit more moderate productivity dynamics alongside stronger emissions–output decoupling. The growth decomposition shows that EAMFP accounts for a substantial share of variation in environmentally adjusted output growth, while natural capital generally represents a complementary source of growth. However, its role differs across regions and resource types: non-renewable natural capital is particularly relevant in the Middle East & North Africa, while renewable natural capital is relatively more noticeable in Latin America & the Caribbean and Sub-Saharan Africa. These findings demonstrate that environmental performance and resource endowments alter the interpretation of productivity dynamics and support region-specific productivity assessments that explicitly account for natural capital and environmental constraints.
- How to cite: Agudelo, Y., Mosquera-López, S. and Larrea-Basterra, M. (2026). Environmentally adjusted productivity growth: accounting for natural capital across world macro-regions. Journal of Productivity Analysis, 65(41). https://doi.org/10.1007/s11123-026-00823-4
