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Published by: Tyndall Centre for Climate Change Research on May 02, 2007
Copyright:Attribution Non-commercial

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Economic theory and the transition to sustainability:a comparison of general-equilibriumand space-time-economics approaches
Terry Barker November 2004
Tyndall Centre for Climate Change ResearchWorking Paper 
62
 
 1
 
The transition to sustainability:a comparison of general-equilibriumand space-time-economicsapproaches
Dr Terry Barker
Tyndall Centre for Climate Change ResearchandDepartment of Applied EconomicsUniversity of CambridgeSidgwick AvenueCambridge CB3 9DE, UKe-mail: terry.barker@econ.cam.ac.ukTyndall Centre Working Paper No. 62November 2004
This paper was presented to the International Workshop on Integrated Assessment of Sustainable Development, April 1-2, 2004, ICTP, Trieste, Italy.
 
 2
Please note that Tyndall working papers are "work in progress". Whilst they are commented on by Tyndall researchers, they have not been subject to a full peer review. The accuracy of this work and the conclusions reached are the responsibility of the author(s) alone and not the Tyndall Centre.
Summary
Computable General Equilibrium (CGE) models are widely used in the assessment of policiesdirected towards sustainable development, such as emission permits for CO
2
abatement. Thispaper argues that these models, based on marginal neoclassical analysis, are too rigid andstylised to represent the system-wide changes necessary over many years if economicdevelopment is to become sustainable. Generally they rely on one year’s data to projectdecades into the future, relying on unfounded assumptions to generate the transition from thecurrent economic structure to a sustainable one. They purport to measure the costs of policiesfor sustainability, but these costs are for marginal changes in models that are based onimplausible assumptions about technical change, industrial organisation and consumerbehaviour. Furthermore the solutions of the models rely on contrived functional forms of equations, chosen not for their realism but for their tractability.The CGE approach is contrasted with a space-time economics (STE) systems approach basedon less restrictive measure theory and numerical analysis that emphasises indivisibilities,externalities, socio-political valuations and economies of specialisation. The conclusion of thepaper is that CGE models are misleading and inadequate tools for policy analysis. For long-run sustainability analysis, they are not only misleading but represent a fundamentalmisunderstanding about economic systems and how they change.

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