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Towards incorporating natural capital into a computable general equilibrium model for Scotland

Author

Listed:
  • Grant Allan

    () (Department of Economics, University of Strathclyde)

  • David Comerford

    () (Department of Economics, University of Strathclyde)

  • Peter McGregor

    () (Department of Economics, University of Strathclyde)

Abstract

Natural capital encompasses those assets which are provided by nature and which are valued by economic actors. As such, there is a clear analogy between natural and other assets, such as physical capital, which are routinely included in models of national economies. However, the valuation of natural assets, to the extent that they are included in such economic models, is typically wrapped up in physical capital along with land values or not valued at all. This could be simply a measurement problem - natural capital might be difficult to appropriately disaggregate from other capital - or because they provide non-market goods which are not included within traditional measures of economic output. The purpose of this paper is to set out - both conceptually and practically - how natural capital can be added to a computable general equilibrium (CGE) model. We focus on: the conceptual differences that should be reflected in such an extension; the challenges of implementing the extension in practice; and identifying the value added generated by an appropriately augmented model. We explore the empirical implementation of our approach through the addition of carbon emissions and an agricultural biomass ecosystem service flow to our CGE model of the Scottish economy. This working paper specifies this CGE model development, but does not go as far as fully implementing it in the CGE model. When fully implemented in the context of a CGE with a disaggregated agriculture sector, this will allow us simultaneously to track the impact of disturbances, including policy changes, on the economy and the environment and therefore on sustainable development. In the longer-term comprehensive coverage of natural capital stocks and ecosystem services will allow us to track the impact of disturbances, including policy interventions, on Green GDP and Genuine Savings, as well as on aggregate and sectoral economic activity, energy use and emissions.

Suggested Citation

  • Grant Allan & David Comerford & Peter McGregor, 2018. "Towards incorporating natural capital into a computable general equilibrium model for Scotland," Working Papers 1808, University of Strathclyde Business School, Department of Economics.
  • Handle: RePEc:str:wpaper:1808
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    More about this item

    Keywords

    Natural capital; computable general equilibrium models;

    JEL classification:

    • Q57 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Ecological Economics
    • Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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