Accounting for Nature in Economic Models

We build a two-block general equilibrium model that accounts for Nature by including, alongside man-made capital, natural capital defined as a variety of ecosystem goods and services essential to economic activity. Natural capital is unevenly distributed, displays critical thresholds or ’tipping points’ beyond which the ecosystem is irreversibly altered, and contributes to the evolution of productivity. We show that: (1) when natural capital is abundant, it is optimal to deplete some and conserve some, but less depletion should occur if there is a critical threshold beyond which Nature is irreversibly altered; (2) subsidizing the conservation of Nature makes long-run growth stronger and more sustainable in Nature-rich and Nature-poor countries alike, but implies lower consumption globally in the short run.