Modelling

2 Understanding the green economy

The key drivers of a green economy, as represented in the global model developed for the analysis carried out in the GER, are stocks and flows of natural resources in addition to the stocks and flows of capital and labour which are important in any long-term economic model. Stocks are accumulations of inflows and outflows (as forests are the accumulation of reforestation and deforestation). In the T21-World model, moreover, capital and labour are needed to develop and process natural resource stocks. Thus, three key factors transform natural resources into economic value added: the availability of capital (which accumulates through investments and declines with depreciation), labour (which follows the world demographic evolution, especially the age structure, and labour force participation rates), and stocks of natural resources (which accumulate with natural growth – when renewable – and decline with harvest or extraction). Examples of the direct impact of natural resources on GDP are the availability of fish and forest stocks for the fishery and forestry sectors, as well as the availability of fossil fuels to power the capital needed to catch fish and harvest forests, among others. In this respect, the T21 model accounts for both monetary and physical variables representing each sector in a coherent and consistent manner. Other natural resources and resource- efficiency factors affecting GDP include water stress and waste recycling and reuse, as well as energy prices, all of which are endogenously determined.

The analysis carried out in the GER focuses on the transition towards a green economy, characterised by high resource- efficiency and low-carbon intensity, assessing the needs for a short- to medium-term transition and evaluating the impacts of a longer-term green economic development. Emphasis is therefore naturally put on stocks because they define the state of the system, as highlighted by projections of many key indicators for sustainability, such as the ecological footprint.1

In fact, longer-term sustainable

growth is related to the sustainable management of natural resources, such as water, land and fossil fuels. Increasing the efficiency of use and curbing waste of such resources would reduce the decline of stocks, or even support their growth in certain cases. In this respect, understanding the relationship between stocks and flows is crucial (e.g. the concentration of emissions in the atmosphere may keep increasing, even if yearly emissions are kept constant or decline. Carbon concentration will decline only if yearly

1. The ecological footprint is a measure of humanity’s demand on nature. It represents how much land and water area a human population requires to regenerate the resources it consumes and to absorb its wastes (GFN 2010).

emissions are below the natural sequestration capacity of forests and land, among others).

The economic growth of recent decades, while profiting from the contribution of natural resources, did not allow stocks to regenerate (as has been illustrated by the Millennium Ecosystem Assessment). For instance, today only 25 per cent of the commercial fish stocks, mostly of low-priced species, are underexploited (FAO 2008) and some 27 per cent of the world’s marine fisheries had already collapsed by 2003 (Worm et al. 2006); oil production has reached its peak and is declining in most countries (EIA 2009), and global peak oil is expected to take place between now and 2015 according to some (ASPO-USA 2010) or after 2030 according to others

Gross Domestic Product

Resource inflow

Supply of natural resources

Fossil fuels Water Forests

Demand of natural resources

Resource depletion

Resource efficiency

Figure 1: The relations between economic growth and natural resources

Natural resources are both a driver and a possible constraint of economic growth. The higher GDP, the higher demand for natural resources; growing demand leads to higher production, which depletes stocks – all else being equal. Declining stocks, on the

other hand, reduce potential medium- to longer– term production of natural resources, potentially constraining economic growth. Resource efficiency is promoted in the GER, to reduce demand and improve the management of supply. The rebound effect is also taken into consideration, as it normally reduces the intended benefits of efficiency improvements by increasing demand.

507