This paper critically examines various methods for estimating productivity incorporating environmental effects for the Australian agricultural sector. The agricultural sector has been selected because of its strategic position in the economy of Australia. The findings of this study indicate that the application of environmentally adjusted productivity methods is a credible approach to measure productivity, in the context of sustainable development. Although the empirical findings of this research are case study specific, the results provide evidence supporting the adoption of these techniques to other sectors of the economy when measuring productivity and needing to be cognisant of sustainable development. The findings suggest that adjusting for the environmental impacts of soil erosion can result in higher or lower agricultural productivity depending on the assumptions we make regarding damage costs of erosion. It is argued in this paper that, for soil erosion in Australia, assumptions yielding higher productivity (i.e., upwardly adjusted) are justified. Finally, the findings of this study and the use of the methods presented point to important gaps in data availability. This gap needs to be addressed by policy makers if sustainable development objectives are to be credibly assessed using these techniques.