Measuring the Wealth Economy: Natural & Social Capital

M a t t h e w A g a r w a l a

ESCoE Research Seminar

11 February 2020

ONS, London

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If citing, please use: Agarwala, M., Coyle, D., Felici, M., Lu, S., Wdowin, J., and Zenghelis, D. (2020)

The hit list.

• Wealth is future-focused

• Missing social capital

• Global economies need global statistics

• On the horizon…

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Stock of ingredients determines the size of the pie.

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The six ‘capitals’ drive growth and prosperityThe Wealth Economy project seeks to augment GDP with a small dashboard recording access to key assets

• Physical assets and produced capital, including access to infrastructure, and to new technologies

• Human capital, the accumulated skills, and the physical and mental health, of individuals

• Intangible knowledge assets e.g. intellectual property, data

• Net financial capital

• Natural capital, the resources and services provided by nature

• Social and institutional capital personal, social, civic relationships

Wonderlane/Unsplash

Wealth embodies the future

• Measuring assets means assessing future value: the future is ‘priced in’

• Not only can new assets be stranded or created, but our understanding of the endogenous development of the economy can itself radically alter our ability to cope with and manage change.

• Statistics are the lens through which we observe the economy: policymakers, businesses and individuals change their behaviour in response to the picture they see through that lens

• What people believe changes shadow prices and behaviour

Indicative fossil fuel range

Measuring social capital

The data and the technique

• Eight waves of the European Social Survey (2002/2016)

• Demographic and socio-economic profile of the individual

• Responses to 10 trust questions: 7 on trust in institutions and 3 on trust in people

• Use PCA to uncover underlying components of trust

The two components

About 50% of total variation

About 15% of total variation

Variations across age, income, and time

Age and time Income and time

Regression coefficients for age and income

Generalised Trust People versus Institutions

-0.4 -0.2 0 0.2 0.4 0.6 0.8

31/40

41/50

51/60

61/100

Second

Third

Fourth

Fifth

Dif

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0 0.1 0.2 0.3 0.4 0.5

31/40

41/50

51/60

61/100

Second

Third

Fourth

Fifth

Dif

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Chosen by the ISC for Success Metrics Project

Perspectives in wealth accounting

Emissions reduce wealth. But whose?

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Net Exporters

Net Importers

-600 -400 -200 0 200 400 600 800 1000 1200 1400

United States

Japan

United Kingdom

Germany

France

Italy

Brazil

United Arab Emirates

Switzerland

Turkey

Rest of Western Asia

Indonesia

Greece

Ukraine

Taiwan

Kazakhstan

South Africa

India

Russian Federation

China

Millions of tons of CO2

Production - Consumption Based Emissions

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2 ways to calculate country level damage coefficients

RICE Integrated Assessment Model

• Heterogeneous regions

• Modeled relationships

• Assumes we know more than we do about climate-economy interactions

• Autarkic conditions

New Climate Economy

• Country level

• Observed relationships

• Doesn’t assume we understand complex mechanisms

• ‘Baked in’: trade relationships, adaptation over 50 years

Calculating country coefficients: IAMs• IAMS typically work at global scale

• RICE is a regional run of DICE• 13 regions (aggregated to 8 for modelling)

• China & US each constitute 1 region

• 6 remaining regions represent rest of the world

• Countries grouped by political or economic similarity (Nordhaus & Boyer 2000)

Other High Income

JapanAustraliaAruba CanadaIsraelHong Kong

OECD Europe

GreecePortugalFinlandIceland

Middle Income

South KoreaBrazilBarbados

RICE Model assumes no trade

Tricky, if you want to analyze CO2 trade

Share of global emissions: Production Perspective

Share of global emissions: Damage Perspective

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Climate Damages Are Worse

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We can use this.

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£1 trillion

NatCap Asset value 27,500 years saved by vegetation & air

filtration

£78 billion:

500m from green space

£248 million:

Cooling & shading services

Source: https://www.ons.gov.uk/economy/environmentalaccounts/bulletins/uknaturalcapitalaccounts/2019 @MatthewAgarwala

Source: https://www.ons.gov.uk/economy/environmentalaccounts/bulletins/uknaturalcapitalaccounts/2019

Which assets would you hold?

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This is about capital management

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GrowthStability

Competitiveness

• Depletion adjusted net national income

• Building blocks for economic activity

• Environmental regulation• Transition opportunities• Capital complementarities

• Physical risk• Tipping points• Litigation risk• Transition risk

NatCap accounts inform capital management & macro strategy

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Tax

Borrow

Fiscal Triangle

Spend

• Subsidies• Procurement• Environmental protection• Resource management• Restoration costs• Potential liabilities

• Potential revenues• Vulnerability of current

revenues• Correcting market failures• Incentivising innovation

• Green bonds• Performance bonds• Infrastructure investment

NatCap accounts organize data for planning the fiscal triangle

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