Soft-Coupling of National Biophysical and Economic Models for Improved Understanding of Feedbacks

Rather than attempting to create a single integrated economic-environment model of the Australian economy, this paper presents research on the linking or soft-coupling of separate environment and economic models. The model of the environment is provided by the Australian Stocks and Flows Framework (ASFF), used to identify the significant physical challenges facing Australia in the decades ahead. To address the perceived issue of missing prices in the ASFF this research explores how the link with economic models can be made, and demonstrates several advantages of taking this approach. This paper shows the results of coupling the ASFF with two different economic models, a partial equilibrium model and a dynamic monetary circuit model, which differ substantially in their fundamental assumptions and representation of the way national economies function. This demonstrates the flexibility inherent in soft-coupling separate models, as compared with the more common approach of using fully integrated models. We find coherence of the biophysical model with the partial equilibrium model is limited as the latter does not have a system-wide extent. The coupling between biophysical and dynamic economic models demonstrates the role of increasing efficiency as a driver of economic growth and subsequent environmental degradation. Copyright (C) 2010 John Wiley & Sons, Ltd and ERP Environment.