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Spatial aggregation and the value of natural capital |
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| Affiliation: | 1. The World Bank, United States;2. Georgetown University, United States;1. Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science, Houghton Street, London, WC2A 2AE, United Kingdom;2. The Ragnar Frisch Centre for Economic Research, Norway;3. The Department of Economics, University of Oslo, Postboks 1095 Blindern, 0317, Oslo, Norway;4. Environmental Economics and Natural Resources Group, Sub-Department of Economics, Wageningen University, P.O. Box 8130, 6700 EW, Wageningen, the Netherlands;5. Centre for Ecological and Evolutionary Synthesis (CEES), Department of Biosciences, University of Oslo, Norway;1. Research Economist, USDA Forest Service Pacific Southwest Research Station, USA;2. Department of Applied Economics, Oregon State University, USA;3. Bren School of Environmental Science & Management, University of California, Santa Barbara, USA;1. Department of Economics, Nanyang Technological University, 637332, Singapore;2. Department of Economics, Indian Institute of Management Rohtak, Haryana, 124010, India |
| Abstract: | Location matters for the value of capital assets. The value of changes in natural capital wealth can depend on whether natural capital asset prices are measured locally and then aggregated or whether average values are applied over aggregate representative areas. Spatial heterogeneity of resource characteristics and institutions impact approximations of the intertemporal welfare function and accounting price function because when spatial aggregation precedes valuation it implies greater arbitrage opportunities leading to more inelastic shadow (accounting) price functions than when valuation is done locally and then aggregated. Aggregation of observed values across varying resource and institutional characteristics can lead to omitted variables bias. We illustrate these results in the context of groundwater in the Kansas High Plains Aquifer and demonstrate that the accounting price function is less elastic when the accounting price is measured locally. Failure to measure locally and then aggregate could lead to undervaluing scarce resources and overvaluing plentiful ones, which biases wealth accounts in favor of passing the non-declining wealth sustainability test. |
| Keywords: | Green accounting Inclusive wealth Genuine savings Sustainability Groundwater Q01 Q25 Q56 R32 |
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