FEEM working papers "Note di lavoro" series
2005 .088

How Substitutable is Natural Capital?


Authors: Anil Markandya, Suzette Pedroso
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Type: Journal
Keywords: Wealth accounting,Natural resources,Nested CES production function
JEL n.: O47,Q24,Q32
JEL: Environmental and Resource Economics
Pages: Vol. 37, No. 1, pp. 297-312
Date: 05/2007

Abstract

One of the recurring themes in the sustainability literature has been the legitimacy of using an economic framework to account for natural resources. This paper examines the potential for substituting between different inputs in the generation of income, where the inputs include natural resources such as land and energy resources. A nested CES production function is used to allow flexibility in the estimated elasticities of substitution. Also, with this specification, natural resources and other inputs are combined in different levels of the function, thus allowing for different levels of substitutability. Institutional and economic indicators are also incorporated in the production function estimated. Results show that the elasticities derived from functions involving land resources were generally around one or greater. Furthermore, changes in trade openness and private sector investment have a statistically significant and direct relationship with income generation. No statistically significant relationship between income and any of the institutional indicators was found.

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