How Substitutable is Natural Capital?

20 Pages Posted: 28 Jul 2005

See all articles by Anil Markandya

Anil Markandya

Basque Centre for Climate Change (BC3); University of Bath

Suzette Pedroso

World Bank

Date Written: December 2005


One of the recurring themes in the sustainability literature has been the legitimacy of using an economic framework to account for natural resources. This paper examines the potential for substituting between different inputs in the generation of income, where the inputs include natural resources such as land and energy resources. A nested CES production function is used to allow flexibility in the estimated elasticities of substitution. Also, with this specification, natural resources and other inputs are combined in different levels of the function, thus allowing for different levels of substitutability. Institutional and economic indicators are also incorporated in the production function estimated. Results show that the elasticities derived from functions involving land resources were generally around one or greater. Furthermore, changes in trade openness and private sector investment have a statistically significant and direct relationship with income generation. No statistically significant relationship between income and any of the institutional indicators was found.

Keywords: Wealth accounting, Natural resources, Nested CES production function

JEL Classification: O47, Q24, Q32

Suggested Citation

Markandya, Anil and Pedroso, Suzette, How Substitutable is Natural Capital? (December 2005). FEEM Working Paper No. 88.05, World Bank Policy Research Working Paper No. 3803, Available at SSRN:

Anil Markandya (Contact Author)

Basque Centre for Climate Change (BC3)

Gran Vía 35-2
Bilbao, Vizcaya 48009

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Suzette Pedroso

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

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