Enconomic growth and biodiversity

Economic growth and biodiversity: a sectoral model

Many scientists are claiming that the Sixth Mass Extinction of species is underway. On top of the direct impacts on human well-being through the emergence of zoonoses or the risk of biological annihilation, one reason to worry is that biodiversity provides numerous ecosystem services that are essential to the economy. The aim of this paper is therefore to propose a macroeconomic growth model that takes into account the dynamics of biodiversity and the ecosystem services it provides. The model is inspired by Dasgupta’s methodological proposal emphasizing on the embeddedness of the economy in nature. However, I rework the production function of Dasgupta: (i) concrete ecosystem services, such as the supply of biomass and water, are directly included in the production process and replace the notion of natural capital, and (ii) the economy is divided into three sectors (agriculture “a”, industry “i” and services “s”) in order to better reflect its interactions with nature. Using the environmental extensions of the GLORIA MRIO database, I calibrate the following production functions, for \(j \in \{a,i,s\}\):

\[Y_j = A_j \times \prod_{l=1}^{m} ES_{jl}^{\gamma_{l,j}} \times K_j^{1-\alpha_j-\theta_j} L_j^{\alpha_j} \times T_j^{\theta_j}\]

I show that only agriculture and industry rely on provisioning ecosystem services (\(ES\)) and that agriculture relies on land (\(T\)) with a very low elasticity of \(\theta_a \approx 0.03\), in this Cobb-Douglas framework. Next, an in-depth review of the biology literature led me to select two relationships that are useful for endogenising biodiversity in an optimal growth model. Both the “Species-Area relationship” (SAR) and the “Biodiversity-Ecosystem Functioning relationship” (BEF) are useful to grasp the mutual interactions between biodiversity and the economy:

\[S = (\overline{T}-T)^{z} \And ES = B^\sigma\]

where \(S\) is the long term level of biodiversity, \(B\) is the current level and \(\overline{T}\) the total stock of land. \(B\) is converging to \(S\) at the relaxation rate \(\epsilon\): \(\dot{B}=-\epsilon(B-S)\).

In a static framework, I show that the optimal share of natural habitat depends on several key parameters, mainly related to the production structure, when an agent only values consumption and not nature itself:

\[\frac{\overline{T}-T^*}{\overline{T}}=1-\frac{\theta_a }{\theta_a + z \sigma \left( \gamma_a + \gamma_i \frac{\alpha_a}{\alpha_i}\frac{l_0-l_a}{l_a}\right)}\]

I find that \(\frac{\overline{T}-T^*}{\overline{T}}\approx33\%\) with previously estimated values of \(\alpha\), \(\theta\) and \(\gamma\) and typical values of \(z\), \(\sigma\) and \(l\), which is lower than the current share of world natural habitat (\(\approx45\%\)). This result must be taken with caution and reveals certain limitations of the neoclassical exercise that I discuss in the paper.

Beyond the simple static exercise on the structural determinants of the level of conservation of natural habitats, I build a biodiversity-integrated optimal growth model, in which I assess the potential impacts of several policies on the optimal share of natural habitat. In this model, the representative agent consumes three types of goods (from agriculture, industry and services) with non-homothetic preferences calibrated to mimic the observations at a country level in the GLORIA database. Because of these non-homothetic preferences, I show that policies such as reduction in food waste or land use intensification (without considering negative externalities of chemicals on biodiversity) lead to a higher optimal share of natural habitat. Also, I show that going vegetarian leads to similar results, when plant proteins are taken into account in animal feed.

The next step of my work will consist in decentralizing the equilibrium in order to (i) assess the potential rebound effects that could occur after implementing policies, especially in the case of land use intensification and (ii) grasp what could be a tax on land designed to internalize the negative impact of land conversion on the provision of ecosystem services and on the direct welfare of a representative agent. Overall, beyond developing methodological ideas, the aim of this paper is to shed light on the mechanisms at work behind the macroeconomic and environmental consequences of sectoral policies aimed at changing the way we interact with biodiversity.