Tracing the Evolution of Natural Capital in Global Sustainability Metrics: The Advance of Inclusive Wealth

chen, shuning and Managi, Shunsuke (2024): Tracing the Evolution of Natural Capital in Global Sustainability Metrics: The Advance of Inclusive Wealth. Forthcoming in: Sustainability Science (2024)

Abstract

Natural capital defines planetary boundaries and provides a basis for sustainable development. This study reviews previous theoretical developments and confirms that natural capital accounting within the Inclusive Wealth (IW) framework provides a robust link between current capital assets and intergenerational well-being. This study contributes to the literature by combining theoretical advances with practical applications to address criticisms of empirical practice and improve the reliability and scope of cross-country natural capital accounting. An analysis of natural capital levels and changes in 163 economies over the past 30 years reveals significant regional disparities in the decline of global natural capital. In low-income countries, consumption driven by population growth and primary production patterns is severely depleting renewable natural capital. In middle-income countries, urbanization exacerbates natural capital depletion by substituting other forms of capital for natural capital. The wealth status of major G20 economies points to intensive environmental costs and loss of ecosystem services under technological progress, which ignores public ecosystem externalities. This study demonstrates the urgency of natural capital depletion awareness in the management of all economies and highlights the ability of natural capital accounting within the IW framework to inform policy decisions on sustainable growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: Natural capital, Sustainability, Inclusive Wealth, Comprehensive Wealth
• Subjects: F - International Economics > F6 - Economic Impacts of Globalization; I - Health, Education, and Welfare > I3 - Welfare, Well-Being, and Poverty; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics

References

[1]. Center, B. P. (2020). Annual energy outlook 2020. Energy Information Administration, Washington, DC, 12, 1672-1679.

[2]. Arrow, K. J., Dasgupta, P., Goulder, L. H., Mumford, K. J., & Oleson, K. (2012). Sustainability and the measurement of wealth. Environment and Development Economics, 17, 317–353.

[3]. Arrow, K., Dasgupta, P., Goulder, L., Daily, G., Ehrlich, P., Heal, G., . . . Walker, B. (2004). Are we consuming too much? Journal of Economic Perspectives, 18, 147–172.

[4]. Barbier, E. B. (2017). The concept of natural capital. Oxford Review of Economic Policy, 33, 157–170.

[5]. Barbier, E. B. (2021). The evolution of economic views on natural resource scarcity. Review of Environmental Economics and Policy, 15, 24–44.

[6]. Bateman, I., & Mace, G. (2020). The natural capital framework for sustainable, efficient and equitable decision making. Nature Sustainability, 3, 776–783. doi:10.1038/s41893-020-0552-3

[7]. Brander, L. M., de Groot, R., Guisado Goñi, V., van 't Hoff, V., Schägner, J. P., Solomonides, S., . . . Sinclair, M. (2024). Ecosystem Services Valuation Database (ESVD). Tech. rep., Foundation for Sustainable Development and Brander Environmental Economics. Retrieved from https://www.esvd.net/

[8]. Chen, S., Kurita, K., Wakiyama, T., Kagawa, S., & Managi, S. (2023). Inclusive wealth footprint for cities in Japan: regional clusters for sustainable development. Sustainability Science, 18, 2293–2307.

[9]. Cheng, D., Xue, Q., Hubacek, K., Fan, J., Shan, Y., Zhou, Y., & Zhang, X. (2022). Inclusive wealth index measuring sustainable development potentials for Chinese cities. Global Environmental Change, 72, 102417.

[10]. Daly, H. E. (1997). Beyond Growth: The Economics of Sustainable Development. Beacon Press.

[11]. Daly, H. E. (2017). Toward some operational principles of sustainable development. In The economics of sustainability (pp. 97–102). Routledge.

[12]. Daly, H. E., & Farley, J. (2009). Ecological Economics: Principles and Applications. Island Press.

[13]. Dasgupta, P. (2000). Valuing biodiversity. The Nature Conservancy.

[14]. Dasgupta, P. (2007). Economics: A Very Short Introduction. Oxford University Press.

[15]. Dasgupta, P. (2021). The Economics of Biodiversity: The Dasgupta Review. Tech. rep., HM Treasury. Retrieved from https://www.gov.uk/government/publications/final-report-the-economics-of-biodiversity-the-dasgupta-review

[16]. Dasgupta, P., Managi, S., & Kumar, P. (2022). The inclusive wealth index and sustainable development goals. Sustainability Science, 17, 899–903.

[17]. Ekins, P. (2003). Identifying critical natural capital: Conclusions about critical natural capital. Ecological Economics, 44, 277–292.

[18]. Fenichel, E. P., Abbott, J. K., Bayham, J., Boone, W., Haacker, E. M., & Pfeiffer, L. (2016). Measuring the value of groundwater and other forms of natural capital. Proceedings of the National Academy of Sciences, 113, 2382–2387.

[19]. Folke, C., Polasky, S., Rockström, J., Galaz, V., Westley, F., Lamont, M., & Walker, B. H. (2021). Our future in the Anthropocene biosphere. Ambio, 50, 834–869.

[20]. Food, & of the United Nations, A. O. (2020). FAOSTAT database. FAO.

[21]. Groom, B., & Turk, Z. (2021). Reflections on the Dasgupta Review on the Economics of Biodiversity. Environmental and Resource Economics, 79, 1–23.

[22]. Hamilton, K. (2016). Measuring sustainability in the UN system of environmental-economic accounting. Environmental and Resource Economics, 64, 25–36.

[23]. Hartwick, J. M. (1977). Intergenerational equity and the investing of rents from exhaustible resources. American Economic Review, 67, 972–974.

[24]. Hein, L., Bagstad, K. J., Obst, C., Edens, B., Schenau, S., Castillo, G., . . . Caparrós, A. (2020). Progress in natural capital accounting for ecosystems. Science, 367, 514–515. doi:10.1126/science.aaz8901

[25]. Helm, D., Hepburn, C., & Ruta, G. (2012). Trade, climate change, and the political game theory of border carbon adjustments. Oxford Review of Economic Policy, 28, 368–394.

[26]. Hickel, J., & Kallis, G. (2020). Is green growth possible? New Political Economy, 25, 469–486.

[27]. Hicks, J. R. (1940). The valuation of the social income. Economica, 7, 105–124.

[28]. Ikeda, S., Managi, S., & Zhang, W. (2017). Evaluating the impact of urbanization on natural capital and human welfare. Ecological Indicators, 77, 218–225.

[29]. Islam, M. Z., & Managi, S. (2019). Assessing natural capital and sustainability in India: A regional analysis. Journal of Environmental Management, 233, 790–800.

[30]. Lange, G.-M., Wodon, Q., & Carey, K. (2018). The Changing Wealth of Nations 2018: Building a Sustainable Future. World Bank Publications.

[31]. Managi, S., & Kumar, P. (2018). Inclusive Wealth Report 2018: Measuring progress toward sustainability. Routledge.

[32]. Mirrlees, J. A. (1969). The Theory of Moral Hazard and Unobservable Behaviour: Part I. Review of Economic Studies, 66, 3–21.

[33]. Narayanan, B., Aguiar, A., & McDougall, R. (2012). Global Trade, Assistance, and Production: The GTAP 8 Data Base. Center for Global Trade Analysis, Purdue University.

[34]. Nations, U. (2015). Transforming Our World: The 2030 Agenda for Sustainable Development. United Nations.

[35]. Nations, U. (2020). System of Environmental-Economic Accounting 2012—Experimental Ecosystem Accounting. United Nations.

[36]. Nations, U. (2021). System of Environmental-Economic Accounting—Ecosystem Accounting (SEEA EA). United Nations.

[37]. Nordhaus, W. D. (1991). To slow or not to slow: The economics of the greenhouse effect. The Economic Journal, 101, 920–937.

[38]. Obst, C., Hein, L., & Edens, B. (2016). National accounting and the valuation of ecosystem assets and their services. Environmental and Resource Economics, 64, 1–23.

[39]. Olley, G. S., & Pakes, A. (1996). The Dynamics of Productivity in the Telecommunications Equipment Industry. Econometrica, 64, 1263–1297.

[40]. Pachauri, R. K., Allen, M. R., Barros, V. R., Broome, J., Cramer, W., Christ, R., & van Ypserle, J.-P. (2014). Climate change 2014: synthesis report. Contribution of Working Groups I, II and III to the fifth assessment report of the Intergovernmental Panel on Climate Change. Tech. rep., IPCC.

[41]. Polasky, S., Bryant, B., Hawthorne, P., Johnson, J., Keeler, B., & Pennington, D. (2015). Inclusive wealth as a metric of sustainable development. Annual Review of Environment and Resources, 40, 445–466.

[42]. Priyadarshini, P., Bundela, A. K., Gaspar Atos, A., Stringer, L. C., Dhyani, S., Dasgupta, R., & Penuelas, J. (2022). Advancing global biodiversity governance: recommendations for strengthening the post-2020 global biodiversity framework. Anthropocene Science, 1, 195–203.

[43]. Priyadarshini, P., Dubey, P. K., Singh, A., Chaurasia, R., & Abhilash, P. C. (2022). The Dasgupta review: resetting the stage for a new paradigm. Frontiers in Ecology and the Environment, 20, 240–246.

[44]. Programme, U. N. (2023). Inclusive Wealth Report 2023: Measuring Sustainability and Equity. Tech. rep. Retrieved from https://wedocs.unep.org/20.500.11822/43131

[45]. Raworth, K. (2017). Doughnut economics: Seven ways to think like a 21st-century economist. Chelsea Green Publishing.

[46]. Rockström, J., Steffen, W., Noone, K., Persson, Å., Chapin III, F. S., Lambin, E. F., & Foley, J. A. (2009). A safe operating space for humanity. Nature, 461, 472–475.

[47]. Roman, P., & Thiry, G. (2016). The inclusive wealth index. A critical appraisal. Ecological Economics, 124, 185–192.

[48]. Samuelson, P. A. (1961). Foundations of Economic Analysis. Harvard University Press.

[49]. Sen, A. K. (1976). Real National Income. Review of Economic Studies, 43, 19–39.

[50]. Solow, R. M. (1993). Sustainability: An Economist's Perspective. In Economics of the Environment: Selected Readings (pp. 179–187). W.W. Norton & Company.

[51]. Spash, C. L., & Hache, F. (2022). The Dasgupta Review deconstructed: An exposé of biodiversity economics. Globalizations, 19, 653–676.

[52]. Steffen, W., Broadgate, W., Deutsch, L., Gaffney, O., & Ludwig, C. (2015). The trajectory of the Anthropocene: the great acceleration. The Anthropocene Review, 2, 81–98. doi:10.1177/2053019614564785

[53]. Steffen, W., Crutzen, P. J., & McNeill, J. R. (2007). The Anthropocene: are humans now overwhelming the great forces of nature. Ambio-Journal of Human Environment Research and Management, 36, 614–621.

[54]. Steffen, W., Richardson, K., Rockström, J., Cornell, S. E., Fetzer, I., Bennett, E. M., & Sörlin, S. (2015). Planetary boundaries: Guiding human development on a changing planet. Science, 347, 1259855.

[55]. Stern, N. (2007). The Economics of Climate Change: The Stern Review. Cambridge University Press.

[56]. Stiglitz, J. E. (2009). GDP fetishism. Economist's Voice, 6, 5.

[57]. Stiglitz, J. E., Fitoussi, J.-P., & Durand, M. (2018). Beyond GDP: Measuring What Counts for Economic and Social Performance. OECD Publishing.

[58]. Stiglitz, J. E., Sen, A., & Fitoussi, J.-P. (2010). Mismeasuring Our Lives: Why GDP Doesn't Add Up. The New Press.

[59]. Sugiawan, Y., & Managi, S. (2018). The impact of energy consumption on wealth. Energy Economics, 75, 575–587.

[60]. Sugiawan, Y., Kurniawan, R., & Managi, S. (2023). Assessing the United Nations sustainable development goals from the inclusive wealth perspective. Scientific Reports, 13, 1601.

[61]. Survey, U. G. (2021). Mineral commodity summaries 2021. US Geological Survey. doi:10.3133/mcs2021

[62]. TEEB. (2010). The Economics of Ecosystems and Biodiversity Ecological and Economic Foundations. Earthscan.

[63]. Terzi, S. (2021). Rethinking capital and sustainability: An appraisal of the Inclusive Wealth Index. Sustainability Science, 16, 893–904.

[64]. UNU-IHDP, & UNEP. (2012). Inclusive Wealth Report 2012: Measuring Progress Toward Sustainability. Cambridge University Press.

[65]. UNU-IHDP, & UNEP. (2014). Inclusive Wealth Report 2014: Measuring Progress Toward Sustainability. Cambridge University Press.

[66]. Weitzman, M. L. (1998). Recombinant growth. The Quarterly Journal of Economics, 113, 331–360.

[67]. Yamaguchi, R., Islam, M., & Managi, S. (2023). Natural capital and wealth accounting for sustainability assessment: A global perspective. International Review of Environmental and Resource Economics, 16, 431–465.

[68]. Zhang, W., Ikeda, S., & Managi, S. (2020). Satellite data and natural capital accounting: A case study of China's provinces. Remote Sensing of Environment, 239, 111646.