Purchasing Power Parities: an essential tool in climate monitoring

The ICP blog series explores ideas and issues under the International Comparison Program umbrella – including innovations in price and data collection, discussions on purpose and methodology, as well the use of purchasing power parities in the growing world of development data. Authors from across the globe, whether ICP practitioners or researchers making use of ICP data, are encouraged to submit relevant blogs for consideration to icp@worldbank.org.

A host of analyses over the last few years have examined the correlation between the size of an economy and its impact on climate. In addition, the costs and socio-economic consequences of climate change have been scrutinized, as have the financing and accounting of mitigation and adaptation efforts. In all three of these areas, there is much advocacy for the use of purchasing power parities (PPPs), as produced by the International Comparison Program. With the anticipated release of the latest global PPP data in 2020, this updated information on the size of national economies, emission and energy intensities, as well as the poverty and the socio-economic costs of climate change can inform future action and policies.

There has been much discussion over the past few decades on the pros and cons of correlating GDP measured in PPP terms, rather than in market exchange rates terms (Xr), against fossil fuel emissions¹. But it is accepted that the GDP (PPP) measure more accurately compares the volume of activity and production of a country to another, and shows that, for instance, India’s economy is four times larger than when measured using exchange rates.

A crude analysis of GDP (PPP) and GDP (Xr) against carbon dioxide emissions for large emitters (see chart) illustrates that the former measure reflects more closely the pattern of countries’ contributions to greenhouse gases: for example, India’s CO2 emissions in 2014 were 1.8 times that of Japan, similar to the ratio between the GDPs of both countries measured in PPP terms (1.5). However, in exchange rate terms, India’s economy is less than half that of Japan’s. Broadly speaking, GDP (PPP) mirrors the intensive industrial production of large middle-income countries such as India, China and the Russian Federation. In terms of emissions intensity—the kg of CO2 emitted per unit of GDP (PPP)—the latter two countries are particularly high, reflecting their reliance on energy intensive industries.

Both the International Energy Agency (IEA) in its report on CO2 emissions from fuel combustion and the UN Environment Emissions Gap report identify GDP (PPP) as a key driver of greenhouse gas emissions, alongside energy intensity.

Sustainable Development Goal 7 measures the energy used to produce one unit of economic output in PPP terms to track energy intensity, and subsequently gains in energy efficiency. SDG 9 seeks similar—more resource-use efficiency and greater adoption of clean and environmentally sound technologies and industrial processes—and measures CO2 emissions per unit of value added in PPP terms to track progress.

Some of the Nationally Determined Contributions provided by countries through the Paris Agreement use emission intensity per unit of GDP (PPP) as a target.  The International Energy Agency reports that two of these countries, China and India, have reduced intensity as their economies have grown and more sustainable processes have been adopted, but overall the volume of CO2 emissions have gone up in the two countries (see chart).

Lastly, in its 2018 report Brown to Green: The G20 transition to a low-carbon economy, Climate Transparency looks at carbon dioxide emission intensity by sectoral GDP expressed in PPP terms to examine industry’s and agriculture’s respective contributions in G20 countries. 

In future blogs we will examine how PPPs are used in the assessment of the cost and consequences of climate change, and in the financing of adaptation and mitigation efforts.