Models Integrating Material Flows And Economic Concerns

The main purpose of this chapter is to describe models that can be used to estimate possible trends in the development of total consumption of physical materials. So far there are not many documented studies in this field: the models used for economic and environmental forecasts most often have dealt with the costs of emissions to air, and are expressed in monetary instead of physical units. To forecast physical material flows, including emissions, one has to integrate an economic model that predicts future extraction, production and consumption with a model that estimates some physical measurements of materials and natural resources, preferably the weight in tons or the embodied exergy content of wastes (a measure of its potential to initiate a chemical reaction with the environment).

An early contribution by Ayres and Kneese (1969) points to the need to integrate a material balance perspective in economic modeling. This need is based on the fact that residuals (waste) are an inherent and normal part of production and consumption. Further, the quantities of these residuals increases with increases in population and/or level of output, and they cannot be properly dealt with by considering different environmental medias in isolation. Ayres and Kneese construct a formal theoretical extension of a general equilibrium model (the so-called 'Walras-Cassel' model), that includes the mass balance condition by introducing an (unpriced) environmental sector and using physical units for production and consumption. In order to become an analytical tool this model has to be fed with enormous amounts of data, and the computation, at least at that time, would have been extremely difficult. The theoretical model is still useful, however, as it shows that partial analysis of isolated environmental problems can lead to serious errors.

There were hardly any applications of the idea propagated by Ayres and Kneese (1969) until 1994, when a work was published describing a dynamic macroeconomic model with a material balance perspective (van den Bergh and Nijkamp 1994). The authors' aim was to construct a model suitable for studies of the long-term relationship between an economy and its natural environment. The model was designed to capture two main elements. The first was the two-way interaction between population growth, investments, technology and productivity, on one side, and declining environmental quality and resource extraction on the other. The second element was a more realistic representation of the interdependence between various environmental effects achieved by using the material balance perspective. The model integrates economic growth theory and material balance accounting by combining complex interactions between the economy and the environment. It is not analytically soluble, but is more suitable for simulation. It was calibrated to fulfill certain conditions in a base case scenario, in which logical, realistic or plausible values were chosen for different variables. Then 10 different scenarios were constructed, changing initial stocks of capital, natural resources, pollution and/or non-renewable resources, including or not including ethical concerns and feedback from environment to investment. Van den Bergh and Nijkamp concluded that cautious behavior regarding the environment in the long run does not necessarily lead to (strongly) declining economic performance.

Another effort to connect a material balance module to the MSG model is documented in Ibenholt (1998). The main purpose of that study was to analyze the generation of waste in production processes, on the basis of the physical law of conservation of mass. The difference between the physical input (raw materials and intermediate goods) and the produced physical output (intermediate or final goods) is the residual consisting of emissions to air, land and water. The MSG-EE model, an energy and environmental version of MSG (Alfsen et al. 1996), was used to predict the economic variables needed for the analysis, namely production and use of different physical inputs, all measured in monetary units. The factors converting monetary to physical units were assumed to be constant during the forecasting period (1993-2010), meaning that each monetary unit of a physical input or product in each production sector has a constant weight. This is of course a simplification, but it may be fairly realistic, considering the aggregation level (between 30 and 40 physical input and output goods). The method does not consider changes in the material intensity of each physical input or output, but it does incorporate changes in the amount of total material input per produced unit.

The study predicts a growth in the residuals from manufacturing industries of 74 per cent from 1993 to 2010. The growth is partly explained by an anticipated growth in material intensity along the economic development path. Increasing material intensity is partly caused by the strong substitution possibilities between labor and material input in the MSG model, and it might very well be overestimated. The study did not include any alternative scenarios, such as different policies towards the material consumption, since the main purpose was to compare the mass balance perspective on waste generation with the method used in Bruvoll and Ibenholt (1997), where the generation of waste was explained by the development either in physical input or in production.

Another approach is described in Dellink and Kandelaars (2000). They combined the Dutch AGE model Taxinc with the material flow model Flux, which is an input-output type of database that describes the physical flows of materials in the Netherlands in 1990. The integration is incomplete since there is no endogenous feedback between the two models. The purpose of the study is to analyze material policies with the aim of reducing the use of specific materials (zinc and lead). The following policies were simulated: a regulatory levy on the primary use of zinc, on the throughput of zinc, on products that contain zinc, on the primary use of lead, and on the primary use of both zinc and lead. The tax revenue from the material levy was redistributed by reducing the employer's contribution to social security. First the material flow model is used to determine the use of zinc and lead in different production sectors, which determines the magnitude of the tax for each sector. The levy is then imposed in the Taxinc model and a new equilibrium is calculated. The result from the Taxinc model is imported to the Flux model to calculate the effect in physical units. The conclusion that can be drawn from the study is that the macro-economic impact of the tested tax policies achieved reductions in material use of 5 to 10 per cent while total production decreased by less than 0.2 per cent. The material-intensive production sectors would, however, suffer rather severe effects. Since the model does not allow for substitution between different materials, the results should be interpreted with great care.

Two related studies are Bruvoll (1998) and Bruvoll and Ibenholt (1998). Bruvoll (1998) uses the MSG model to simulate a green tax reform where a tax is levied on plastic, wood pulp, cardboard and virgin paper materials, while the payroll tax is decreased (employers' contribution to social security). The tax rate in different production sectors is calculated on the basis of data from the national accounting system. The effects from this tax reform are similar to the ones in Dellink and Kandelaars (2000), namely that a rather substantial reduction in material use is possible at a rather low macroeconomic cost. Bruvoll and Ibenholt (1998) levy a general tax on all materials used in production, and show a clear, positive environmental effect in the form of reduced emissions to air and waste quantities. However, the welfare effect is uncertain owing to reductions in production and material consumption.

Other studies that forecast waste generated are Nagelhout et al. (1990), Bruvoll and Ibenholt (1997, 1999) and Andersen et al. (1999). All these studies use fixed coefficients to explain the generation of waste, but they differ in the choice of explanatory variables. Nagelhout et al. (1990) and Andersen et al. (1999) use production and consumption forecasts by an economic model as explanatory variables, whereas Bruvoll and Ibenholt (1997, 1999) link waste generated in production sectors to the use of intermediates. A weakness of the method of fixed coefficients is the inability to capture changes in the material intensity that ought to lead to changing waste amounts.

In summary, there are few economic models integrating a material perspective and none of them can be regarded as anything more than a step towards a comprehensive and analytical model. Nevertheless, these models can yield valuable insights.

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