Lecture 06 – Inclusive Wealth

Associate Professor Justin A. Johnson

Agenda

• Question about the midterm. Should we have it?
• Quick return to the VS Code and the earth_economy_devstack
• Necessary to have a good shot at assignment 3
• Discuss the three big debates in climate economics
• Also necessary for assignment 3
• Introduce Inclusive Wealth
• Discuss measurements of Inclusive Wealth

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Earth-Economy Devstack

A playground for linking models.

The Earth Economy Devstack

• The installation instructions you followed ended with you using Git to Clone the Earth Economy Devstack
• Create a directory for the Earth Economy Devstack at C:\Users\<YOUR_USERNAME>\Files (PC) or ~/Files (Mac)
• We add a Files directory to keep the root directory clean and to make it easier to find the Earth Economy Devstack in the file explorer.
• Open a terminal or command prompt and navigate to the directory you created
• Required commands (windows): cd [change directory], cd.. [go up one directory]
• So I would first run “cd c:\users\jajohns\Files”
• Run the git clone command to clone the Earth Economy Devstack repository
• git clone https://github.com/jandrewjohnson/earth_economy_devstack

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VS Code

• VS Code works for all languages
• Can even be used to write a whole dissertation
• Latex, Overleaf integration, creation of typeset books (we’ll look at these shortly)
• Very customizable
• Here’s where I set it to Light+ colorscheme
• Has a huge library of “extensions” for different tasks

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The Command Palate

• VS Code is easiest to control using the “Command Palate”
• Open it by pressing ctrl-shift-p

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• In this box, you can control nearly everything in VS Code
• For instance, if you type the words “light theme” and select that option, you can change to the light theme like me.

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Connect VS Code to Github

To do this, we will “Enable Settings Sync”, which will prompt you to Sign in to GitHub.

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To do this, open the command palate <Ctrl-Shift-P> and type “settings sync”

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Alternatively

• Press Ctrl+Shift+P (or Cmd+Shift+P on Mac) to open the command palette
• Type "GitHub: Sign In" and select it

Select GitHub as the way to sign on.

This will launch a browser window to authenticate your computer.

Allow this to happen with “Open Visual Studio Code”

After login, GitHub will authenticate into VS Code

Allow it.

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We are now able to push and pull code, clone repositories, and contribute to OSS.

Before we use Git, let’s talk about file structure

• In your Users/Files directory, create a new folder apec_8602.
• This should be “next to” (in the same directory as) your base_data directory you’ve been downloading things to from the base data.
• We are going to clone the course repo into apec_8602.

Clone the course repository

• Back in VS Code, in the command palate type the word “clone” (use crtl-shift-p)
• This will give you a “Clone from Github” option. Paste in the class repository link https://github.com/jandrewjohnson/apec_8602_2025 and hit enter
• It will ask you where you want to put the Repository.
• Select the apec_8602 directory you just created
• When you hit enter, Git will “clone” (download) the repository, including its entire file history, to your computer.
• It’s hard to explain how awesome Git and version control are, so I won’t explain it. Instead, I’ll just say this is the bedrock of the open-source software revolution.
• When it finishes cloning, it’ll ask you if you want to open the repository. Say yes!

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If all of the above failed, you can at least get the code by manually downloading from github

• https://github.com/jandrewjohnson/apec_8222_2022_fall
• There is a download Zipfile option in the green code button.

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Open the Earth Economy Devstack in VS Code workspace

• Navigate to the directory where you cloned the Earth Economy Devstack
• In the repository, there is a file called earth_economy_devstack.code-workspace. Launch this.
• If configured correctly, the full path would be C:\Users\<YOUR_USERNAME>\Files\earth_economy_devstack\earth_economy_devstack.code-workspace (PC) or ~/Files/earth_economy_devstack/earth_economy_devstack.code-workspace (Mac)

Configure VS CODE

• Install required extensions
• Install the Julia extension in VS Code
• Click on the extensions icon in the left sidebar
• Search for Julia and Install
• Optional:
• Install Quarto extension in VS Code (website example)
• Install GitGraph extension in VS Code (devstack_example)
• Sign in to VS Code with your GitHub account
• Click on the account icon in the bottom left corner of the window and follow prompts

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What IS the Devstack?

• The workspace we just opened is a set of preconfigured tools that we’ll be using for the rest of the semester (and possibly your class paper and dissertation?)
• It’s also an evolving set of Docs about how to do everything
• Let’s poke around there

Three big debates in Climate IAM space

• What is the relationship of a change in carbon to a change in temperature?
• Climate sensitivity
• What is the relationship of a change in temperature to a change in economic damage?
• The damage function
• How much do we care about the future?
• The Discount Rate

Climate Sensitivity

TL;DR meta analysis: Climate sensitivity uncertainty

Source: Sherwood et al. 2020. Reviews of Geophysics

https://doi.org/10.1029/2019RG000678

Temperature increase in degrees C from doubling atmospheric CO2

One method for calculating it: the MAGICC Model

"Model for the Assessment of Greenhouse Gas Induced Climate Change"

MAGICC modeling approach

• Emissions (taken from econ model)
• Concentrations
• Generates the RCPs. Not as simple as you’d think.
• Nonlinearities, time lags, carbon cycle, interaction with land-use change, chemical processing of aerosols
• Radiative Forcing:
• Quantifies imbalance in the energy budget of the Earth-atmosphere system caused by changes in greenhouse gas concentration
• Is typically expressed in watts per square meter (W/m²).
• Climate Response (Delta temp)
• Play around with emissions to OBSERVE to climate sensitivity

• MAGICC is the magic that gets us from SSPs and other “exogenous drivers” to specific climate outcomes.
• This is also what feeds into spatialized climate downscaling models

Concentration pathways

Here’s for a good RCP

• Temperature change
• Year of peak surface air temperature change

Here’s for a bad RCP

Climate sensitivity

• Once the climate system is understood, can get the climate sensitivity by just running the model a bunch of times:
• Ex here using the MAGICC Model

Tl;dr: big meta analysis

Damage function

Impacts of climate change

• Sea-level rise
• Estimate the dollar value of damage caused by increased flooding caused by sea-level rise to coastal property (cities, villages, agriculture)

What the world looked like 20kya

Discount rate and SSC

Estimates of damages: Social cost of carbon

• Biden Administration: rejects Trump SCC
• Establishes an interim price: $51/ton CO₂
• Reinstate the Interagency Working Group to update SCC
• Planned to release new SCC in January 2022
• Still waiting for release
• SCC will be challenged in Congress and in the courts
• “These things have to be carefully done, or else they’re easily reversed”... “You have to go through a very disciplined process because you want it to be scientifically and economically justified.” Hunter Johnston, a partner at Steptoe & Johnson LLP (https://news.bloomberglaw.com/environment-and-energy/biden-climate-rules-move-ahead-amid-wait-for-final-carbon-metric)

Differing views on SCC

• Rennert et al. Nature 2022: preferred SCC of $185/ton CO₂
• Use a 2% discount rate
• Make many updates based on National Academy Report (2017) on updating the social cost of carbon
• Considerable uncertainty. Range (5%–95%): $44–$413 per ton CO₂

The effect of discounting on the social cost of carbon

Source: Rennert et al. Nature 2022

Inclusive Wealth

What “should” we optimize?

Caring about the future is not partisan

“The nation behaves well

if it treats its natural

resources as assets

which it must turn over

to the next generation

increased, and not

impaired, in value.”

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~Theodore Roosevelt

26^th President of the US

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Segue from climate change models to inclusive wealth

• Climate models (e.g., DICE) are an example of integrated assessment models that link earth systems and economy

Economy

Atmospheric concentration of GHGs

Climate related damages

Global mean temperature

GHG emissions

Radiative forcing

Damage function

Climate

impacts

Limitations of DICE/ClimateIAMs

• But climate models like DICE are limited in important ways:
• Single aggregate commodity that can be used for consumption or savings (rules out analysis of substitution among goods and services)
• Single link between the economy and earth systems (GHG emissions)
• Single state variable in nature (atmosphere concentration of GHGs, biological stocks such as forests, fish, ecosystem structure…)
• Simple representation of earth systems (only include climate)
• Single aggregate damage function as a percent of total output

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But in reality…

• Multiple goods with degrees of substitution and durability
• Multiple links between the economy and earth systems (GHG emissions, land use, water use, pollution, extractive harvesting…)
• Multiple forms of natural capital (Atmospheric GHG concentration
• Earth systems are complex and interacting (climate, ecosystem processes, hydrological cycles, population dynamics…)
• Multiple way in which earth systems influence the economy (regulatory, material and non-material ecosystem services)

Sustainability and Ethics in DICE

• What does DICE say about sustainable development?
• It characterizes the optimal production/mitigation pathway.
• This is OPTIMAL SUSTAINABLE DEVELOPMENT!
• Subject to the assumptions in the model.
• Like: 1 region, 1 sector.
• Can we really say anything useful about optimality if we cannot distinguish which countries or industries are the winners or losers?
• RICE50+
• DICE with lots of regions.
• But still, some critical elements are ignored.

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A deeper question

• What is the BEST possible approach for defining the “best sustainability”?
• Sustainability: by itself not necessarily good. You can be sustainably bad.
• Best: by itself not necessarily sustainable! Going out in a blaze.
• Economic theory itself has a lot to offer here.
• Can we draw a definition of good sustainability from this body of theory?

Macroeconomics and Natural Resource Economics

• Problems in NRE are formally similar (identical in some cases) to growth models in macroeconomics
• Harvest = consumption
• Resource stock = capital stock
• Leaving resources unharvested = investment in capital stock
• Solution method is similar
• Solve for optimal/equilibrium harvest paths using tools of dynamic optimization
• Optimal control (standard tool for basic problems)
• Alternative: Calculus of variations. Won’t often (ever?) use this approach in this class
• Dynamic programming – will use when we have uncertainty or strategic interactions

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Lets us define a really good metric: Inclusive wealth

• Definition: The aggregate value of all capital assets, where the value of a unit of a capital asset is measured by the contribution it makes to increasing current and future human well-being
• Sometimes called comprehensive wealth or genuine wealth
• To be truly inclusive, measures of inclusive wealth must incorporate the value of all forms of capital.
• not including a declining asset would give a false sense of security about sustainability.�

Starting from a simple model of economic growth

Could expand this to cover the obviously-missing elements

Incorporation of time

Standard inclusion of utility

Optimization over time

Inclusive wealth and sustainable development

• Non-declining human well-being:

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• Very simple definition of sustainable development
• Note: maintaining capital is essential to maintain ability to produce flows of well-being

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Achieving sustainable development means that Welfare is non-declining through time

The elephant on the page

• Notice that the types of capital have different trajectories.
• This model assumes that is totally okay (at least if it does indeed result in higher welfare.
• Also note the different generational welfare

Efforts to Measure Inclusive Wealth

Efforts to measure inclusive wealth� Arrow et al. (2012)

• Ambitious attempt to measure change in inclusive wealth for five countries (US, China, India, Brazil, Venezuela) from 1995 to 2000
• How well do they do on the measurement challenges?
• Note: the authors are quite candid about methodological shortcomings and data gaps

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Results: components of natural capital (table 1)

Results: components of inclusive wealth and change in wealth

Results: summary measure of inclusive wealth vs. GDP growth

Efforts to measure inclusive wealth

UNEP Inclusive Wealth Reports

(2012, 2014, 2018, 2023)

UNEP Inclusive Wealth Reports

• Reports are not inclusive
• Natural capital only includes:
• Fossil fuels and minerals: market values. Change in inclusive wealth equals the negative of production value (non-renewable resources)
• Value of agricultural land
• Forests: uses the Ecosystem Services Assessment Database (Van der Ploeg and de Groot 2010)
• Fisheries (use harvest to estimate parameters of logistic growth to estimate stock)

Ongoing efforts to develop more complete metrics

• UN Statistics Division:
• System of National Accounts (produces GDP accounts)
• System of Environmental-Economic Accounting (SEEA): Central Framework and the Experimental Ecological Accounts (UN 2012, 2013, 2021)
• World Bank:
• Economic Case for Nature (2021)
• Changing Wealth of Nations (2011, 2018)
• Inclusive Wealth Reports (UNEP 2012, 2014, 2018, 2023)
• Human Development Index
• Genuine Progress Index…

Transformed economic, financial and productive systems can lead and power the shift to sustainability

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Nature’s worth to society –

the true value of the various goods

and services it provides –

is not reflected in market prices

because much of it is open to

all at no monetary charge

Adopted as an official statistical framework in March 2021

Challenge of measurement

• “How can we measure whether enough of the assets will be left or accumulated for future generations….can we say that we are currently living above our means?
• Is there “reasonable hope of being able to characterize this with one simple number that could play the role for sustainability that GDP has long played for the measurement of economic performance?”

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Challenge of measurement

• “…if we want to accomplish this, we need to convert all the stocks of resources passed on to future generations into a common metric, be it monetary or not…such a goal seems overly ambitious. The aggregation of heterogeneous items seems possible up to a point for physical and human capital or some natural resources that are traded on markets. But the task appears much more complicated for most natural assets, due to the lack of relevant market prices and to the many uncertainties concerning the way these natural assets will interact with other dimensions of sustainability in the future.” (Mis-measuring our lives, pp. 98-99)

Semi-inclusive wealth

• Rather than attempt to come up with an all-inclusive measure
• Use market prices to measure value of some capital assets (e.g., Arrow et al., Inclusive Wealth Report)
• Track important non-market assets separately (biophysical accounts)
• Dashboard analogy

Thanks

Appendix

Hands on MAGICC

Sidenote on Python Skills

• This class does not have a Python prerequisite
• Next time it will require APEC 8222 I’m hoping…
• But for now, I’m limiting myself to assignments that you could do with only a cursory/googleable understanding of Python
• E.g., fill in specific parameters and rerun rather than whole-code from scratch
• The only requirement I have is that you understand everything on this one quickstart page: https://foundations.projectpythia.org/foundations/quickstart.html
• If you took 8222, you will have already covered all this.

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A word about installing things

• Python has three main ways of pulling in new libraries
• Conda/Mamba: Command line tool that provides pre-compiled libraries
• Pip: Installs re-compilable versions (older, but more flexible way)
• Git: Just clone the repository, or can use Pip pointing to a specific Git Repository
• We used Mamba (which is just a faster version of Conda) to install your whole scientific computing stack.
• Today that will only work for 1 of our 2 tools

Install PyMAGICC

• Open a Command Prompt/Terminal
• Activate the environment you created:
• Mamba activate env2023a
• Install all of the libraries we will use:
• Mamba install pymagicc
• If Mamba works, this is almost always the best choice!
• Once installed, open pymagicc_notebook.ipynb from the class repository

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