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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 • • • • • • • • • • Brander, James A., and M. Scott Taylor. "The simple economics of Easter Island: A Ricardo-Malthus model of renewable resource use." American Economic Review (1998): 119-138. Ecosystems and human well-being. Vol. 5. Washington, DC: Island Press, 2005. Ford, A. (2009). Modeling the Environment. Island Press. ISBN: 9781597264730 Forrester, J. (1961). Industrial Dynamics (Students' Edition edition ed.). The MIT Press. Haberi, Helmut, Fridolin Krausmann, and Simone Gingrich. "Ecological Embeddedness of the Economy: A Socioecological Perspective on Humanity's Economic Activities 1700-2000." Economic and Political Weekly (2006): 4896-4904. Hoffman, R. (2010). A Cybernetic Approach to Economics. Cybernetics and Human Knowing. Vol. 17, no. 4, pp. pp. 89-97. Krausmann, Fridolin, Simone Gingrich, Nina Eisenmenger, Karl-Heinz Erb, Helmut Haberl, and Marina Fischer-Kowalski. "Growth in global materials use, GDP and population during the 20th century." Ecological Economics 68, no. 10 (2009): 2696-2705. Rostow, W. W. (1959). Stages of Economic Growth. The Economic History Review, 12, pp. 1-16. Schreiber, S. J. Differential Equations (Ordinary). Davis, California: University of California. http://www.eve.ucdavis.edu/sschreiber/reprints/differential-equations.pdf Wiesmann, J. G. (n.d.). System Dynamics in Transdisciplinary Research for Sustainable Development. Research for Sustainable Development: Foundations, Experiences, and Perspectives, 345-360. Thank You! Visit us at www.teriin.org Contact: [email protected] [email protected]