Spatial aggregation and the value of natural capital

Ethan T. Addicott and Eli P. Fenichel

Journal of Environmental Economics and Management, 2019, vol. 95, issue C, 118-132

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 (search for similar items in EconPapers)
JEL-codes: Q01 Q25 Q56 R32 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:95:y:2019:i:c:p:118-132

DOI: 10.1016/j.jeem.2019.03.001

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