Download A System Dynamics Approach

Modeling Economic Policies for
Sustainable Consumption of Natural
Resources: A System Dynamics
Approach
Authors: Mihir Mathur, Saahil Parekh, Kabir Sharma,
Arpita Bisht
Presented by Mihir Mathur, TERI, New Delhi
at
INSEE 8th Biennial Conference, Bangalore
Motivation
Introduction and Rationale
• Since the Industrial Revolution, increased access to energy
sources and technological advancement has allowed
greater extraction of natural resources for conversion to
economic goods.
• This has resulted in growth of economy and depletion of
natural resources, both Renewable and Non Renewable
• Exceeding rates of extraction beyond sustainable yields for
renewable natural resources can result in non-linear, often
rapidly declining and sometimes irreversible loss of
resources (MEA, 2005)
• This poses systemic risk to the long term sustenance of the
economy, especially in light of rapidly depleting non
renewable resources
Introduction and Rationale
• Given that the economic system is embedded in the
ecological system, sustainability of the economic system
depends upon the structural relationship between
renewable natural resources and the economic system.
• This paper, using system dynamics, models the complex
interactions between economy and renewable natural
resources.
• Through the hypothetical model, it tests three policy
interventions for their effectiveness in sustaining the
economy: 1) Resource efficiency, 2) Green Growth, and 3)
Localization of Economies.
Research Method and Model
Research Methodology
• System Dynamics (SD) as an approach is best suited to study
(such) nonlinear complex systems using stocks and flows,
internal feedback loops, and time delays.
• The methodology was conceived in the 1960s at the
Massachusetts Institute of Technology (MIT) by Jay Forrester
(Forrester, 1961).
• The model structure and parameters used in this study are not
meant to provide forecast, but is intended to set up a model
environment where simulations can be used to test assumptions
and policy implications.
• The model has been simulated for 300 years to capture the
delayed feedbacks and its long term impacts on the economy
and resources.
Model Description
• The model consists of three sub systems — Renewable
Natural Resources, Local Economy and Industrial
Economy.
• The renewable natural resource stock is taken as a
reservoir of renewable natural resources.
• The local economy is conceptualized as a slow growth,
traditional economy (cottage industries) functioning in
close proximity to its resource base.
• In contrast, the industrial economy represents growing
industrialization and production of goods.
Model Description
• Local Economy and Industrial Economy interact through
money flowing between them
• If the local economy is completely closed, then there is zero
money flowing between industrial economy and local
economy
• While if the local economy is not completely closed then
the households also buy goods from the industrial
economy, while the local cottage industry procures goods
from industrial economy and act like a reseller apart from
having their own production
• Resource intensity is an exogenous variable in the model,
measuring the efficiency of resource use in the economy
(kg/INR)
Key Parameters
Table 1 Key parameters for Base Case
Parameter
Initial value
Initial renewable natural resources
10,000 kgs
Carrying Capacity
20,000 kgs
Natural resources’ regeneration rate
4%
Resource intensity of the economy
1 kg/INR
Local economy’s growth rate
2%
Industrial economy’s growth rate
1-7%
Wealth with households
INR 10
Local cottage industry capital
INR 10
Industrial economy capital
INR 10
Simulations
Comparing Resource Growth and
Economy Growth
1: Renewable Natural Resources
1:
1:
20000
1
1
1
Growth Curve of Stock of
Renewable Natural Resources
15000
1
1:
10000
0.00
Page 12
60.00
120.00
180.00
240.00
300.00
Years
Renewable Natural Resource Growth Curve
1: Industrial Capital
1:
2000000
1
Growth Curve of
Stock of Capital in Economy
1:
1000000
1:
0
1
1
0.00
Page 13
1
60.00
120.00
180.00
Years
Economy Growth Curve
240.00
300.00
Base Case Simulation
1: Renewable Natural Resources
2: GDP
II
1
I
III
IV
1
2
2
2
0.00
Page 6
1
60.00
120.00
180.00
Years
Base Case
1
240.00
2
300.00
Resource Efficiency: Reducing
Resource Intensity of Economy
1: Renewable Natural Resources
2:
2: GDP
GDP
II
II
1
II 1
III III
IV
IV
1
2
2
2
1
1
2
0.00
Page 7
6
60.00
120.00
120.00
180.00
180.00
Years
Years
Resource
Base Case
Efficiency
2
11
240.00
240.00
2
2
300.00
300.00
Green Growth: Increasing Resource
Regeneration
1:
1: Renewable
Renewable Natural
Natural Resources
Resources
I
2:
2: GDP
GDP
II
I
1
1
II
IIIIII
IV
IV
1
1
2
2
22
11
22
0.00
0.00
Page
Page 87
60.00
60.00
2
2
120.00
120.00
180.00
180.00
Years
Years
ResourceResource
Efficiency Efficiency
and Green Growth
11
240.00
240.00
300.00
300.00
Localization: Local Economy Relying on
Only Local Goods and Services
1: Renewable
Renewable Natural
Natural Resources
Resources
2:
2:Local
GDP GDP
11
I
I
1
II
II
III
1
III
2
IV
1
2
2
1
2
0.00
0.00
Page 98
2
2
2
2
1
1
60.00
60.00
120.00
120.00
180.00
180.00
Years
Years
Localization
of and
Economies
Resource
Efficiency
Green Growth
240.00
240.00
300.00
300.00
Extended Time Frame Scenario
1: Renewable Natural Resources
2: Local GDP
1
II
II
1
II
III
1
III
1
2
IV
1
2
1
1
2
1
2
2
2
2
0.00
Page 910
60.00
85.00
120.00
170.00
180.00
255.00
Years
Longer
Localization
Term Scenario
of Economies
of Localization
240.00
340.00
300.00
425.00
Long Cycles in Localized Economy
1: Renewable Natural Resources
2: Local GDP
1
1
1
2
2
2
2
0.00
Page 11
240.00
1
480.00
720.00
Years
Growth Degrowth in Localized Economies
960.00
1200.00
Discussion and Analysis
• The four stages of growth and decline hold true even under
conditions of improved efficiency and green growth.
• While localization is successful in avoiding the overshoot
and decline, under the given simulation time, it still does
not escape economic correction and oscillations over
longer time frames.
• This indicates that the causes of limits to economic growth
are not truly rooted in inefficient resource extraction or
lack of resource restoration.
• As long as the economy continues to grow, its scale of
resource consumption would eventually cause resources to
deplete under any scenario.
Insights and Learnings
• The stock of resources has a maximum carrying
capacity beyond which it cannot grow while there is no
endogenous carrying capacity limit for the economy to
stop its growth.
• As long as the growth in the size/stock of economy is
not controlled it would neutralize efficiency and
conservation/restoration gains ultimately failing to
reach desired goals.
• To achieve sustainability, the world, at all scales, needs
to move towards achieving dynamic equilibrium
between economy and ecology of resources.
Questions for Further Research
• What size of economy is desirable to maintain
sustainable ecology of resources?
• What forms of livelihoods would work when
the economy undergoes correction under long
cycles?
• What are the enabling conditions to reduce
economic growth and move towards
sustainable economies?
SD Model
References
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