Modelling the Index of Sustainable Economic Welfare (ISEW) and its response to policies

TL;DR

This paper integrates the ISEW into a macroeconomic model to simulate its response to policies, highlighting its advantages over GDP and the Doughnut for sustainable welfare assessment.

Contribution

It introduces a dynamic macroeconomic model incorporating ISEW, analyzing policy impacts and comparing it with GDP and the Doughnut for sustainability evaluation.

Findings

All policies increase ISEW, with combined policies yielding the strongest growth.

Working-time reduction decreases ISEW, unlike other policies.

ISEW outperforms GDP in capturing policy effects but misses some environmental costs.

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.