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Eric Neumayer

Expenditure function for investment into human capital Rate of 'resource augmenting' technical progress Rate of Hicks-neutral technical progress Reserves to production ratio Exponent in production function Exponent in production function Rate of interest Discount rate Exponent in production function Time index A verage rate of consumption growth Parameter Parameter Static reserve index Profit Elasticity of substitution Elasticity of output with respect to man-made capital Parameter Elasticity of output with respect to non-renewable resources Parameter Conversion factor

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Eric Neumayer

rate at which the non-renewable resource rent is rising is equal to the interest rate (FR- f R) = FK (FR- f R) (Hotelling rule for non-renewable resources) Similarly for renewable resources (A2.4) (FE-hE) -F - K-az (FE-hE) (A2.5) (Hotelling rule for renewable resources) There is an additional term az to account for the effect resource harvesting has on the stock of renewable resources and thereby on the natural growth rate of the resource. For Z < Z', az > 0, so resource rent is rising at less than the rate of interest. For that case resource harvesting has a

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Weak versus Strong Sustainability

Exploring the Limits of Two Opposing Paradigms, Third Edition

Eric Neumayer

This insightful book explores the limits of the two opposing paradigms of sustainability in an accessible way. It examines the availability of natural resources for the production of consumption goods and services, and the environmental consequences of economic growth. The critical forms of natural capital in need of preservation given risk, uncertainty and ignorance about the future are also examined. The author provides a critical discussion of measures of sustainability. As indicators of weak sustainability, he analyses Genuine Savings and the Index of Sustainable Economic Welfare, also known as the Genuine Progress Indicator. Indicators of strong sustainability covered include ecological footprints, material flows, sustainability gaps and other measures, which combine the setting of environmental standards with monetary valuation.
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Eric Neumayer

industrialisation and rapid economic growth in the early 1960s, when Carson (1962) expressed her fear about a 'silent spring' due to the death of birds being exposed to DDT. The book became very popular and so, albeit slowly, became the environmental movement popular (for an overview, see McCormick 1989). It was not before the ozone layer depletion, climate change, and biodiversity loss became major issues in the 1980s, however, that environmental degradation was perceived as a potential constraint to economic growth as such. Interest by that time shifted away from natural

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Eric Neumayer

(1996) and Vin- 136 Weak versus Strong Sustainability cent, Panayotou and Hartwick (1997) analyse the modifications needed for open economies trading with each other. Because the Hotelling rule must hold in the optimisation model, resource rent is assumed to rise at the interest rate. 12 With marginal extraction costs not falling at a rate higher than the interest rate, future resource prices will be higher than current ones, thus providing the resource exporter with improving terms of trade. Due to that, the exporter of natural resources can make a smaller

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Eric Neumayer

to those activities that promise the highest net rate of return. That is, they will maximise the profits from a portfolio of different national assets. From this perspective, natural capital and hence biodiversity are but one asset in the portfolio, that is they must compete with other assets for allocation of resources that are necessary for sustenance (Swanson 1994). Because of our uncertainty and ignorance about the real value of biodiversity, natural capital is often (rightly or wrongly) thought of as not being worth conserving and is hence converted into

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Eric Neumayer

and go straight to Section 2.3, which introduces in more detail the two opposing paradigms. There it is explained what their major differences are with respect to the possibilities of substituting for natural capital. Section 2.4 provides a case study on climate change, which illustrates vividly the importance of the substitutability assumption. It is argued that the conflict between those who demand drastic emission reductions and those who demand only minor reductions should really be about the substitutability of natural capital rather than about the right rate

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Giovanni Ruta and Kirk Hamilton

volatility of consumption. To solve this problem, a three-year average of consumption is used. Negative rates of genuine or adjusted net saving. When genuine saving is negative, countries are consuming natural resources and jeopardizing the prospects for future consumption. In order to correct for unsustainable levels of consumption, negative genuine saving is subtracted from consumption. Produced capital The aggregate for produced capital includes physical capital – that is, equipment, machinery and structures – and urban land. The capital approach to sustainability 51

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Kirk Hamilton and Katharine Bolt

ensure that it does not grow faster than the interest rate. These saving rules for competitive economies offer scope for actually using the concept of genuine saving in designing policies for sustainability. There is no shortage of empirical questions when it comes to measuring genuine saving. Among the challenges that appear the most urgent are: ● ● ● ● Identifying non-linearities in the natural world that may not be captured in any simple way in measures of genuine saving. We do not want to be assuring ministers that all is well because saving is positive, only to

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Geoffrey McNicoll

economic growth, and as urban industrialization distanced most economic activity from the land, theorists of economic growth lost interest in natural resources. With a focus only on capital, labour and technology, and with constant rates of population growth, savings and technological change, the models yielded steady-state growth paths in which output expanded indefinitely along with capital and labour. More elaborate formulations distinguished among different sectors of the economy. In dualistic growth models, for example, a low-productivity, resource-based agricultural