Ecosystem Services and the Macroeconomy: A Review of Linkages and Evaluation of Analytical Tools
Creators: name: Smith, Rodney B. W.
name: Smith, Rodney B. W.
Publisher: name: Unknown
Year: 2013
Subjects: Environmental Economics and Policy

description: Natural capital is essential to the performance of sustainable development, supporting our way of life and achieving the Millennium Development Goals. Because of the numerous and complex links between economy and the ecosystem services, and the need to inform the public of the potential economic and social problems resulting from diminished levels of ecosystem service provision, it is important that ecosystem services are taken into account in the macroeconomic decisions. The objectives of this report are (i) to summarize and critique the existing models used for examining macroeconomic and ecosystem linkages (meta-models); (ii) to develop an alternative model that circumvents the major criticisms of the existing meta-models; and (iii) to provide two examples of how the model has been empirically implemented. Based on the assessment of the existing models, it can be argued that the existing macroeconomic-ecosystem models suffer from one or more of the following problems: (i) the economic side of the model does not include exchange prices chat are generated within the model (hence, little confidence can be placed in how the model chooses input and output levels, and hence economic performance); the ecosystem does not feed back into the economy (implication being the economy is not affected by ecosystem or natural asset restoration or decline); (iii) the economy does not directly affect the ecosystem (implication being it ignores the impact of pollution and cannot accommodate events like fishery collapses); and (iv) one of the major determinants of per capita economic growth, savings, are exogenous to the model (major, nuanced, implication being that such models are of limited use in conducting long run analysis). Each of these shortcomings almost certainly introduces a bias in the predicted ecosystem values generated by the existing meta-models. The model developed for this report addresses each of the above meta-model shortcomings, and provides examples of the types of insights and ecosystem value measures we can get when implementing it. The empirical findings from report-model illustrate how to use the model to measure the contribution of ecosystem service to gross domestic product (GDP), and how to begin measuring the asset value of the ecosystem. One implementation of the model looks at the economics of ecosystem service provision (of water) in the Kanto Plains region of Japan. Results suggests water use accounts for about 2.8% of Japan's GDP in 2008, and predicts water's contribution will fall to about 1.8% by 2058. The same study estimates that for 2008, the total asset value of water in the Kama Plains of Japan, is about one quarter that of the total asset value of its man-made capital. The second implementation of the model examines the impact of electricity subsidies on water values and on agricultural and manufacturing production in The Punjab, India. The empirical results tell us a complete removal of electricity subsidies in the Punjab would lead to a 37% decrease in irrigation water pumped, a 31 % drop in rice production and 11 % increase in manufacturing production and a 7% drop in Punjabi agricultural and manufacturing value-added. Water's total contribution to GDP falls by 30%, but the stock of water and its value increase. The empirical results show chat the structure of the report-model seems promising as a tool for measuring the (provisioning) value of ecosystem services and for measuring part of the value of an ecosystem. The results also indicate that for successful integration of ecosystem services and macro economy, the model should be able to; • Provide meaningful insights into how ecosystem and macroeconomic policy impact macroeconomic performance, ecosystems and ecosystem service values, and ecosystem sustainability, Provide information about the macroeconomic impacts of forestry, fishery, climate change, and land use policy, Measure both the stock and flow value of water services, forest resources, carbon sequestration, and possibly fishery resources. Another point to consider is that the developed model has some limitations. The report-model only attempts to measure the value of provisioning services, while some meta-models attempt to measure the value of provisioning services, along with the value of regulating, cultural and supporting services. The report-model could be adapted to accommodate regulating and supporting services, but may have problems accommodating the number of ecosystem services included in some of the meta-models. Although not a limitation of the model, implementing the report model involves a significant investment in human capital, and may serve as a deterrent for analysts with potential interest in the methodology and the problems it can tackle.