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«ENVIRONMENT AND DEVELOPMENT The Changing Wealth of Nations ENVIRONMENT AND DEVELOPMENT A fundamental element of sustainable development is ...»

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In Latin America and the Caribbean, increases in the value of timber land have contributed 7 percent to the growth in total wealth. This is in large part the effect of a rise in timber prices, which contributed 6 percent to the change in total wealth. Particularly noteworthy is the case of Brazil, where the rise in forest land value contributed 14 percent of the change in total wealth. That increase has been driven mainly by a price rise (12 percent) and to a lesser extent by an increase in production (2 percent). Timber price increases have also been relatively important in East Asia and the Pacific and in South Asia, where they contributed 2 percent of the growth in total wealth.

Subsoil assets also contributed to the growth in natural capital wealth and in total wealth. In Latin America the subsoil asset contribution to total wealth growth was driven both by production increases in oil, natural gas, and minerals, and by unit rent increases, coming mostly from oil. A decrease in exhaustion time for oil in our dataset contributed a 3 percent reduction to the change in total wealth. In South Asia, an increase in unit rents for oil and natural gas contributed 2 percent to total wealth growth, and increases in production of oil, natural gas, coal, and minerals contributed 3 percent.

Summing Up: Land Values and Subsoil Assets Prices, or unit rents, have played a major role in boosting or reducing natural capital’s contribution to changes in total wealth over the period 1995–2005(see figure 3.3). Declining prices for crop and pasture products have led to low or declining natural capital values in a number of countries. Sub-Saharan Africa, South Asia, and Europe and Central Asia, where natural capital changes have resulted in a deduction to total wealth, are a case in point. Such declines have been partially offset by increases in production and yields, but in most cases the price effect has dominated. Land values have contributed positively to growth in total wealth in other regions, namely East Asia and the Pacific and Latin America and the Caribbean. All in all, increases in land asset values have contributed 8 percent to total wealth growth in low-income countries. This is much higher than the 2 percent contribution in lower-middle-income countries and the 1 percent contribution in upper-middle-income countries. This result has been driven in large part by increases in production area for crops (which contributed 4 percent of growth in total wealth), crop yields (5 percent), and pasture production (4 percent). A slump in agricultural and pasture prices has partially offset these effects, contributing 5 percent (see figure 3.4).

60 THE CHANGING WEALTH OF NATIONS

Over the period from 1995 to 2005, prices of subsoil assets increased sharply.

This has contributed to large increases in natural capital in some regions.

The effect has been greater in regions where subsoil assets are a greater share of total wealth. Consequently, in upper-middle-income countries, which are relatively well endowed with nonrenewable resources, the growth in subsoil asset values has contributed 11 percent to the growth in total wealth.

In lower-middle-income countries the contribution was 8 percent, and in low-income countries 4 percent. In OECD countries, subsoil assets have contributed only 1 percent to the growth in total wealth.

Worldwide, the growth in subsoil asset values has been driven by increases in unit rents, which accounted for 71 cents of every dollar increase in total asset value. In developing countries, unit rent increases contributed 65 percent of the increase in subsoil asset values, but in OECD countries the contribution was 82 percent. The reason for the difference is that many developing countries have increased production over the period under study. Energy and mineral extraction increases have contributed as much as 13 percent to total wealth growth in the Middle East and North Africa, 8 percent in Sub-Saharan Africa, and 5 percent in Latin America and the Caribbean.

Price rises have affected some regions more than others. Price increases accounted for 70 percent of subsoil asset increases in the Middle East and North Africa, but only 45 percent in Sub-Saharan Africa. The value goes up to 53 percent if one excludes Nigeria from the sample. By contrast, prices have represented 75 percent of the subsoil asset value increase in the Islamic Republic of Iran and 62 percent in Algeria.

CHANGES IN NATURAL CAPITAL: DECOMPOSING PRICE AND QUANTITY EFFECTS 61

Annex 3.1: Decomposition Methodology Total wealth in a given year is the sum of produced capital, natural capital, net foreign assets, and intangible capital (or residual). In our database, we estimate total wealth and the different types of capital for the period 1995–2005.

Hence, we are able to estimate the change in wealth between 1995 and 2005 (for Europe and Central Asia the estimate is from 2000 to 2005). Decomposition of changes in total wealth into its four major categories (produced, natural, intangible, and net foreign assets) is straightforward since these are all additive. We are interested in going one step further by carrying out decomposition of certain categories, particularly natural capital and intangible capital, into their subcomponents. Since produced capital is estimated as the accumulated stock of investment series, its decomposition would not yield new information.





Decomposition of intangible capital is undertaken in chapter 5, so natural capital is our focus here.

Since we build the estimates of natural capital using information on prices and on physical quantities such as area and yield, we are interested in decomposing the effects of different factors to show their relative importance. In this section we lay out a decomposition methodology adapted from Bacon and Bhattacharya (2007). Natural capital is composed of the present value of the returns to land from crops, pasture and protected areas, forests (timber and nontimber) and subsoil assets (oil, gas, coal, and minerals). Each component in turn is estimated using information on area and yield (or production), prices or unit rents, and exhaustion time. Equation (3A.1) shows how crop wealth (CW) is estimated as

an example:

CWt area yield real price rentalrate (T, d). (3A.1)

Wealth is expressed as the product of area cultivated, yield, real price, rental rate, and a value (T, d). The term (T, d) captures the effect of taking the present value of current rents. Alpha depends on the resource’s exhaustion time (when applicable) or the time span over which the present value is taken—expressed by T—and the value of the discount rate d.

The logarithmic mean Divisia index (LMDI) is used to decompose change in crop wealth into the additive effects of changes in area, yield, real price, and alpha (rental rates for crops are assumed constant over time and across countries). For details, see Bacon and Bhattacharya (2007). The change in crop wealth from 2000

to 2005 can then be written as follows:

CW CW(2005) CW(2000) Aeff + Yeff + Peff + Weff. (3A.2)

62 THE CHANGING WEALTH OF NATIONS

In equation (3A.2), Aeff is the effect of changes in area under crop cultivation; Yeff is the effect of changes in yield of crops; Peff is the effect of changes in real prices, since wealth in 1995 and 2005 is expressed in constant 2005 U.S. dollars; and Weff is the effect of changes in alpha. In our estimates, the rental rate is assumed to be constant. Applying the LMDI index, each one of these effects can be calculated

as shown in equation (3A.3) for the changes in price:

–  –  –

It is easy to show that for a constant discount rate d and assuming quantity and prices increase at a constant rate, the formula for V0 indeed becomes multiplicative.

5 Note that there can be relatively large figures for the changes in individual components of wealth, such as quantity changes, but the net effect of summing up these changes in components can be small owing to the cancellation of positive and negative factors.

Reference Bacon, Robert W., and Soma Bhattacharya. 2007. “Growth and CO2 Emissions: How Do Different Countries Fare?” Environment Department Paper 113, World Bank, Washington DC.

PART 2

–  –  –

THE RELEASE OF THE STERN REVIEW ON THE ECONOMICS OF

climate change (Stern 2006), the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC 2007b), and World Development Report 2010 on development and climate change (World Bank 2010) has given a significant boost to the profile of climate change as a development issue. Data on the emission of greenhouse gases have become central to the monitoring of emission reduction commitments by individual countries, while discussions about historical responsibility for the causes of climate change have focused on the accumulation of greenhouse gases emitted by individual countries (see, for example, den Elzen et al. 1999).

In this chapter we approach the greenhouse gas problem from a wealth accounting perspective. This is important because the damages produced by these gases will have an impact on future well-being and on the sustainability of individual countries and the world. Greenhouse gases, and carbon dioxide (CO2) in particular, have distinctive economic characteristics that affect the analysis of the wealth of nations.

Our goal is to estimate, for each country, the economic value of both the flow of CO2 emissions and the stock of atmospheric CO2 that is the result of historical emissions. The value of CO2 emissions is directly linked to the social cost of carbon, discussed below. Establishing the value of CO2 stocks requires an

76 THE CHANGING WEALTH OF NATIONS

economic rationale and methodology for valuing these stocks, and this is one of the contributions of the chapter.

The chapter is best viewed as an exercise in what Paul Samuelson famously termed “positive economics.” Our contribution to the climate debate is to establish values of CO2 stocks and flows by applying economic principles of valuation, without considering normative issues. But we obviously recognize that normative and ethical issues are at the heart of the climate debate, and so we offer some reflections on application of the principles of corrective justice as well as on the range of ethical principles that can be brought to bear on the climate problem.

Climate change is driven by the emission of a range of substances with different warming potentials and atmospheric lifetimes, including methane, nitrous oxide, and black carbon, in addition to CO2. For the purposes of this chapter we will focus only on CO2, a choice that is driven by purely practical considerations: carbon dioxide is by far the largest contributor to climate change, and long time-series estimates of CO2 emissions are available.

Below we outline the economics of climate change, highlighting the social cost of carbon as a key element. This is followed by an examination of how property rights to the global commons influence how we should do the wealth accounting.

Finally, we present our estimates of the value of CO2 stocks and flows for 2005.

We begin by presenting the scientific consensus on climate change and drawing out the implications for developing countries.

Climate Science and the Development Consensus The successive assessment reports of the Intergovernmental Panel on Climate Change (IPCC) reflect an evolving scientific consensus on whether the global climate is changing and whether human activity has been the main driver of change. The fourth and latest assessment (IPCC 2007b) draws the strongest conclusions to date. A summary for policy makers (IPCC 2007a) makes the

following assertions, among others:

Warming of the climate system is unequivocal, as is now evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice and rising global average sea level.

Most of the observed increase in global average temperatures since the mid-20th century is very likely due to the observed increase in anthropogenic GHG [greenhouse gas] concentrations. It is likely that there has been significant anthropogenic warming over the past 50 years averaged over each continent (except Antarctica).

Continued GHG emissions at or above current rates would cause further warming and induce many changes in the global climate system during the 21st century that would very likely be larger than those observed during the 20th century.

WEALTH ACCOUNTING IN THE GREENHOUSE 77

Anthropogenic warming could lead to some impacts that are abrupt or irreversible, depending upon the rate and magnitude of the climate change.

The scientific consensus presented by the IPCC is strong and clear, therefore.

Below we draw upon the scientific literature to establish baselines for how much of the anthropogenic CO2 that was emitted historically still resides in the atmosphere, and we estimate each country’s share of that stock.

Climate change as a development challenge is the central focus of World Development Report (WDR) 2010. A key finding of the report is that up to 80 percent of the damages from climate change will be borne by developing countries. This outcome is largely driven by the high dependence of developing countries on natural resources, particularly agricultural land, as a source of income. Other chapters of this book highlight the dependence of low-income countries, in particular, on natural resources as a share of total wealth.



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