Modelling the Index of Sustainable Economic Welfare (ISEW) and its response to policies
🤖 AI Summary
This study addresses the gap in existing literature by incorporating the Index of Sustainable Economic Welfare (ISEW) into the COMPASS ecological macroeconomic model for the first time, enabling dynamic simulation of policy impacts on sustainable welfare. Integrating biophysical boundaries and social thresholds from the Doughnut framework, the model employs system dynamics to assess the combined effects of carbon taxation, income redistribution, and reduced working hours. Results demonstrate that all policy combinations enhance ISEW, with synergistic implementation yielding the greatest improvement. While ISEW proves more informative than GDP in capturing sustainable welfare, it still partially underrepresents environmental costs. The Doughnut framework thus offers a more comprehensive lens for evaluating policy outcomes across ecological and social dimensions.
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📝 Abstract
Given the challenge of achieving societal welfare in an environmentally sustainable way, the Index of Sustainable Economic Welfare (ISEW) has emerged as an alternative indicator of progress in response to critiques of Gross Domestic Product (GDP). The ISEW compares the benefits of economic activity with its social and environmental costs. So far, most studies empirically analyse the ISEW for past developments, while no studies have simulated the ISEW using a dynamic macroeconomic model. We address this important gap by incorporating the ISEW into COMPASS, an ecological macroeconomic model that features the Doughnut of biophysical boundaries and social thresholds. First, we analyse how the ISEW is affected by three social and environmental policies: a carbon tax, income redistribution, and working-time reduction. We find that the ISEW grows in all scenarios. The strongest improvement over business-as-usual arises when all policies are combined, while the individual policies mostly affect the ISEW positively. Only in the case of working-time reduction, the ISEW decreases. Our study underscores the benefit of dynamically modelling the ISEW for anticipating the net effect of multiple impulses and their interconnections on the indicator. Second, we explore how the ISEW compares to GDP and the Doughnut when evaluating social and environmental policies. Our results suggest that the ISEW is better than GDP at capturing their effects, but it omits the full environmental costs of growth. We argue that the Doughnut, with its comprehensive picture of biophysical boundaries and social thresholds, provides better guidance for policymakers striving for sustainable wellbeing.
Problem
Research questions and friction points this paper is trying to address.
Index of Sustainable Economic Welfare
sustainable welfare
policy evaluation
ecological macroeconomic modelling
GDP critique
Innovation
Methods, ideas, or system contributions that make the work stand out.
Index of Sustainable Economic Welfare
ecological macroeconomic modelling
Doughnut economics
policy simulation
sustainable wellbeing
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