The cost of natural capital consumption: Accounting for a sustainable world economy

The System for integrated Environmental and Economic Accounting (SEEA) has been criticized in this journal for ignoring the benefits of ecosystem services for human well-being. This paper argues that extended national accounts should not attempt measuring economic welfare. Rather, they could and should assess the environmental sustainability of economic activity as the cost of natural capital consumption. The global application of SEEA concepts and methods demonstrates the feasibility of international green accounting. For the world economy, sustainability costs run to about 3 trillion US$ or 6% of world GDP. Large variations at national and regional levels suggest that conventional economic indicators may significantly overstate economic progress in some parts of the world. Data gaps and lack of data comparability affect these first estimates. National and international statistical services should be more aggressive in greening the national accounts. More prudent and more sustainable economic policies might be the result.     

Ecosystem services and regional development: An application to Sweden

This study carries out interregional comparisons of development and sustainable use of natural capital with and without inclusion of non-marketed ecosystem services. A simple dynamic model of an open economy shows that appropriate adjustment of conventional income accounts includes flow and stock components, but excludes explicit entrance of pollution. Calculations are made for Swedish regions and for two types of ecosystem services — pollution sequestration and recreational services — provided by three types of ecosystems: forests, agricultural landscape and wetlands. When comparing the adjusted and non-adjusted regional income accounts it is shown that the two measurements generate significantly different pictures of regional income and growth; regions that are traditionally considered as relatively less growth promoting are shown to hold important sources of wealth from natural capital, while counties that are rich in conventional accounts fall behind when adjusting for values of changes in natural capital.     

Credit rationing, interest rates and capital accumulation

A simple endogenous growth model is developed to characterize credit rationing through the capital accumulation process. The model shows that credit rationing on investment loans decreases as capital accumulates and the enforcement cost decreases. We find that the evolution of the interest rate factor (lending interest rate/depositing interest rate) has a similar pattern to the credit rationing probability. However, simulations show that the evolution of the interest rate spread through the capital accumulation process depends on the degree of the enforcement cost. In the empirical part of the paper, we consider fifty-two countries, at different stages of development, over the period 1995–2005. We confirm the theoretical findings relative to the evolution of the interest rate spread and interest rate factor with capital accumulation. These results suggest that, for economies endowed with costly contract enforcement, the interest rate factor could be a better proxy of credit rationing than the interest rate spread.     

Comparative costs and conservation of wild species in situ, e.g. orangutans

The extent to which conservation is feasible is constrained by budgets and the financial sacrifice stakeholders are willing to bear. Therefore a possible objective for conserving a species is to minimise the cost of achieving that stated aim. For example, if a minimum viable population (MVP) of a species is to be conserved, the size and type of habitats reserved for this could be selected to minimise cost. This requires consideration of the comparative (relative) opportunity costs of reserving different land types for conservation. A general model is developed to demonstrate this and is applied to the case of the orangutan. In the ecological literature, recommendations for reserving different types of land for conservation have been based on comparisons of either the absolute economic returns they generate if converted to commercial use or on differences in the density of a species they support. These approaches are shown to be deficient because they ignore relative trade-offs between species population and economic conversion gains at alternative sites. The proposed model is illustrated for orangutan conservation.     

Conserving biodiversity with tradable permits under changing conservation costs and habitat restoration time lags

Tradable permits are a common environmental policy instrument that has recently been applied also to the conservation of biodiversity. Biodiversity conservation differs in many respects to the classical applications of tradable permits like emissions control. One particularity is that, even if the permit system maintains a constant total amount of species habitat, habitat turnover (the destruction of a habitat and restoration elsewhere) affects the ecosystem. Another particularity is that the restoration of habitats often takes much time, leading to time lags between the initiation of restoration activities and the time when restored habitat is available for trading. We use an agent-based model of a tradable permit market to study the influence of heterogeneous and dynamic conservation costs and habitat restoration time lags on key variables of the market, such as the costs incurred to the market participants and the amount of habitat turnover. Our results show that there may be trade-offs between these key variables. We also find that restoration time lags can lead to fluctuations in permit prices that reduce the efficiency of the permit market. We conclude that temporal lags deserve a careful analysis when implementing tradable permit systems for the preservation of natural habitats and biodiversity.     

Pitfalls and potential of institutional change: Rain-index insurance and the sustainability of rangeland management

Rain-index insurance is strongly advocated in many parts of the developing world to help farmers to cope with climatic risk that prevails in (semi-)arid rangelands due to low and highly uncertain rainfall. We present a modeling analysis of how the availability of rain-index insurance affects the sustainability of rangeland management. We show that a rain-index insurance with frequent payoffs, i.e. a high strike level, leads to the choice of less sustainable grazing management than without insurance available. However, rain-index insurance with a low to medium strike level enhances the farmer's well-being while not impairing the sustainability of rangeland management.     

Natural capital, subjective well-being, and the new welfare economics of sustainability: Some evidence from cross-country regressions

The measurement of natural capital and its management during the economic development process are important aspects of the capital approach to sustainable development. However, the assessment of social welfare in terms of genuine savings (or changes in total wealth per capita) is arguably too limited. This paper tries to make a case for the incorporation of subjective well-being measures in debates about sustainable development by exploring the macro-level relationship between subjective well-being and natural capital in a cross-country setting. It is tested whether natural capital per capita is correlated with subjective well-being in a sample of fifty-eight developed and developing countries, using natural capital data from the World Bank's Millennium Capital Assessment. Bivariate regressions indicate that it is. When multiple regression models are estimated that include (a) major country-level determinants of subjective well-being (GNI per capita, social capital, income distribution, unemployment, inflation), and (b) regional dummy variables for ex-Soviet Union and Latin American countries, the positive correlation remains. The role of data outliers is carefully explored, and the sensitivity of the results to the use of alternative subjective well-being measures (i.e. life satisfaction, happiness, and a combined life satisfaction and happiness index) is investigated. This does not change the nature of the results. The findings arguably strengthen the case for a ‘new welfare economics of sustainability’ that takes subjective well-being measures into account.     

Endogenous property rights regimes, common-pool resources and trade

A model is developed where opening to trade affects a dynamic common-pool resource stock and welfare through a community's voting decision to institute a property rights regime regulating the stock. The model finds that resource stock levels can decline even when a Markov perfect equilibrium path for labor and property rights regimes are chosen to maximize welfare. Thus, opening to trade can be welfare maximizing even when resource stock declines. Experimental results show that under certain conditions, subjects briefly follow a Markov perfect equilibrium path for property rights regime choice but labor allocations are myopically chosen indicating that some resource dynamics may be considered by subjects.     

Differences and similarities between ecological and economic models for biodiversity conservation

In this paper we investigate an important obstacle which substantially complicates co-operation between ecologists and economists but which has received little attention so far: differences between the modelling approaches in economics and ecology. To understand these differences, 60 models addressing issues relevant to biodiversity conservation have been selected randomly from eight international economic and ecological journals. The models have been compared according to a number of criteria including the models' level of generality; the mathematical techniques employed for formulation and solution of the models; the level of complexity and the way time, space and uncertainty are taken into account. The economic models sampled are formulated and analysed analytically, tend to be relatively simple and are mostly used to investigate general questions. Furthermore, they often ignore space, dynamics and uncertainty. Although some ecological models have similar properties, there is also a substantial number of another type of ecological models that are relatively complex and analysed by simulation. These models tend to be rather specific and often explicitly consider dynamics, space and uncertainty. The integrated ecological-economic models are observed to lie “in the middle” between ecological and economic models. An unexpected result is that they are not more complex than ecological and economic models (as one could have expected from a simple “merger” of models from both disciplines), but have an intermediate complexity.     

Government spending, interest rates, and capital accumulation in a two-sector model

This paper investigates dynamic impacts of a temporary fiscal expansion in a two-sector growth model. If the expansion falls on consumption-investment commodities, capital accumulation can be either promoted or reduced and the short-term interest rate unambiguously rises. If the expansion falls on consumption commodities, capital accumulation is crowded out and the short-term interest rate declines during the period of the fiscal expansion. It is also shown that fiscal spending on the consumption commodity can move the short- and long-term interest rates in opposite directions. JEL Classification: E43, E62, O41     

The evolutionary approach to entropy: Reconciling Georgescu-Roegen's natural philosophy with the maximum entropy framework

The paper explores the relevance of recent developments in the Maximum Entropy hypothesis for reinstating Georgescu-Roegen's natural philosophy, with special emphasis on the concepts of evolution and time. The key point is the naturalization of the notion of ‘subjectivity’ in both the Georgescu-Roegen framework and Jaynes's subjectivistic interpretation of thermodynamics and statistical mechanics. I introduce the concept of ‘observer relativity’ with reference to the evolution of ‘physical inference devices’. Then, the MaxEnt formalism can be understood as a principle underlying natural selection. Further, given natural selection, maximum entropy production (MEP) results from the confluence of maximum power (Lotka) and the maximization of information capacity, driven by energy dispersal. In these processes, hierarchical structures of gradients of energy dissipation reflect alternative positions of system boundaries, and hence different perspectives of observer-relativity. Thus, I can distinguish between observer relative Entropy_OR and observer independent Entropy_OI. This allows to reconstruct conceptually the two notions of time proposed by Georgescu-Roegen, with subjectivistic time seen as time relative to the evolutionary process involving incommensurable qualitative change. I claim that this philosophical view offers a powerful conceptual framework for recent empirical research into the energetics of economic growth.     

Regional versus Multilateral Trade Liberalization,Environmental Taxation,and Welfare

The paper considers trade between identical countries with imperfectly competitive markets, and compares the impacts of regional and multilateral tariff reduction on strategic environmental taxation and welfare. While both forms of trade liberalization increase production and consumption in tariff‐reducing countries, regionalism also reduces production in a non‐participating country and may decrease its consumption. Consequently, regionalism and multilateralism change pollution tax and welfare in the tariff‐reducing countries in similar ways when pollution is local, but in dissimilar ways for global pollution. When pollution is global, regionalism is likely to be preferred to multilateralism for the establishment of free trade among countries.     

Environment, human development and economic growth

Over the last few years, environmental issues have entered into policy design, particularly development and growth policies. Natural resources are considered necessary production inputs and environmental quality is considered a welfare determinant. The integration of environmental issues into economic growth and development theories and empirics is currently widely analyzed in the literature. The effects of natural resources endowment on economic growth are mainly analyzed through the so-called Resource Curse Hypothesis (RCH) whereas the effects of economic growth on environmental quality are part of the Environmental Kuznets Curve (EKC). Furthermore, recent contributions on RCH and EKC have shown the important role of institutions and human development dimensions in building a sustainable development path. In this paper, we attempt to analyze the causal relationships between economic growth, human development and sustainability combining the RCH and EKC models and adopting a human development perspective. Results confirm the importance of high institutional quality and investments for human capital accumulation in order to build a sustainable development path.     

Amenity driven price effects and conservation reserve site selection: A dynamic linear integer programming approach

Most conservation reserve design models presented in the literature are static and ignore the dynamic economic aspects of site selection. Typically conservation programs operate under time-related (e.g. annual) budgets and purchase land over time in a sequential manner. The uncertainty of land development has been incorporated in a few dynamic reserve selection formulations using stochastic dynamic programming. However, the existing formulations do not explicitly deal with inter-temporal price and location linkages. We address this issue here and present a two-period linear integer programming model for conservation reserve design that incorporates amenity driven price feedback effects inherent in the reserve development problem. In addition, the model includes spatial and ecological criteria. We then use this model to answer the question “How suboptimal is ignoring amenity driven price effects in reserve design models?” We apply the model to artificially generated data sets and compare the results with the results of an iterated static model that considers only one period at a time. We find that the dynamic model with price feedback effects selects sites at a lower per-site cost. The policy implication of this finding is that conservation programs should avoid purchasing land in the same neighborhood over multiple time periods.     

The environmental performance of firms: The role of foreign ownership, training, and experience

In this paper we extend the debate on the environmental implications of foreign direct investment in developing countries by examining a new mechanism through which foreign influence can affect the environmental performance of firms. We focus on the extent to which key workers who have had previous training or experience in a foreign owned firm transfer and utilise their knowledge gained to the benefit of the local environment. To this end we use detailed firm-level data on manufacturing firms in Ghana. Our econometric results suggest that the foreign training of a firm's decision maker does reduce fuel use, particularly so in foreign owned firms. Foreign ownership per se does not influence fuel use or total energy use but is found to increase electricity use, perhaps the cleanest form of energy used by Ghanaian firms.     

Global warming and livestock husbandry in Kenya: Impacts and adaptations

This paper examines the economic impact of climate change on livestock production in Kenya. We estimate a Ricardian model of net livestock incomes and further estimate the marginal impacts of climate change. We also simulate the impact of different climate scenarios on livestock incomes. The Ricardian results show that livestock production in Kenya is highly sensitive to climate change and that there is a non-linear relationship between climate change and livestock productivity. The estimated marginal impacts suggest modest gains from rising temperatures and losses from increased precipitation. The predictions from atmospheric ocean general circulation models suggest that livestock farmers in Kenya are likely to incur heavy losses from global warming. The highest and lowest losses are predicted from the Hadley Centre Coupled model (HADCM) and Parallel Climate Model (PCM) respectively, based on the Intergovernmental Panel on Climate Change A2 Special Report on Emissions Scenarios. The paper concludes that in the long term, climate change is likely to lead to increased poverty, vulnerability and loss of livelihoods. Several policy interventions are recommended to counter this impact.     

Budget deficits, capital flows, and long-term interest rates: Cointegration findings for the united kingdom

This study uses cointegration tools to decide whether a long-term relationship exists between budget deficits and nominal long-term interest rates in the United Kingdom, as previous regression estimates have implicitly assumed. Based on maximum eigenvalue, trace, and likelihood ratio tests, as well as two cointegrating vectors, this study finds that a long-term positive relationship exists between the nominal 20-year government bond rate and the central government budget deficit.     

Savings growth and the path of utility

Abstract.  We derive an expression relating the change in instantaneous utility to the growth of net (genuine) saving in an economy with multiple stocks and externalities that maximizes welfare in the utilitarian sense. This result is then shown to hold for decentralized competitive efficient economies as well, to yield an extension of the Hartwick rule: instantaneous utility is non-declining along a development path if genuine saving is decreasing. By way of example the rule is applied as a constant genuine saving rate rule in a simple Dasgupta-Heal-Solow-Stiglitz economy. The rule yields a path with unbounded consumption and higher wealth than on the standard Hartwick constant consumption path.     

Free trade and the burden of domestic policy

Abstract. Consider a small economy facing accession to a exogenously defined trade agreement. Before accession, the government controls trade and pollution policy. After accession, it retains control over pollution policy, but must allow free trade in all goods. This is a choice many governments face while joining trade agreements today. They decide whether greater market access to other members is more valuable than control over trade policy. I ask two questions. All else being equal what happens to environmental policy after accession? Second, what affects the choice of accession and how does this choice impact aggregate welfare? I show that a loss in control over trade policy alters the political incentives determining environmental policy. Before accession, producers can transfer a portion of their burden of environmental regulation to consumers through price increases. After accession the same regulation is borne entirely by producers. Owing to the change in burden, there exist plausible conditions under which the adoption of free trade can lead to more stringent environmental regulation, a reduction in the preferential treatment of special interest groups, and an increase in aggregate welfare.