Frameworks for Formulating Environmental and Climate Change Policies: Perspectives from Environmental-Macroeconomics

The aim of this paper is to demonstrate the significant differences that would emerge in policy formulation, when environmental capital (KN) is explicitly accounted for in macroeconomic analyses. These differences are illustrated with reference to two selected Organisation for Economic Co-operation and Development (OECD) economies namely, Australia and Canada. The main analytic framework considered is a factor utilization function – which traditionally deals with Labour (L) and manufactured Capital (KM). The development of a three-factor function in terms of L, KM and KN enables the display of mistaken notions of economic performance. That is in the absence of KN, policy makers overstate the performance of L and KM. The recognition of mistaken levels of performance with reference to KM and L in standard macroeconomic analyses enables the identification of policy avenues to protect and enhance KN. As illustrated in the paper, the implication of developing and applying environmental-macroeconomic frameworks for formulating environmental and climate change policies is significant.