Abstract for: Natural capital in climate-economic models

Several influential climate-economic models represent increased global warming as the only significant environmental cost of economic growth. This makes assumptions about exogenous productivity growth rates decisive for the climate policy recommendations of the models. However, economic growth may carry multiple environmental and resource-related costs, which may interact with future climate effects. To analyze this possibility the DICE-2007 model by Nordhaus (2008) is expanded with a component that explicitly represents natural capital. In the expanded model, natural capital is influenced by climate change and economic activity and incurs costs to the economy when depleted to lower levels. Including the natural capital component implies more and earlier abatement of CO2 emissions than what is recommended by DICE-2007. The results also show that low-growth scenarios caused by natural capital loss can have opposite policy implications from low-growth scenarios generated by lower factor productivity growth rates. This illustrates the importance of model structure. Non-optimal policies are also analyzed by simulation, which suggests that the costs of choosing the wrong policy are higher in the expanded model.