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

Given the challenge of achieving societal welfare in an environmentally sustainable way, the Index of Sustainable Economic Welfare (ISEW) has emerged as an alternative progress indicator in response to critiques of Gross Domestic Product (GDP). The ISEW compares the benefits of economic activity with its social and environmental costs. Previous studies have analysed the past performance of the ISEW, but none have simulated the ISEW using a dynamic macroeconomic model. We address this important gap by incorporating the ISEW into COMPASS, an ecological macroeconomic model. We analyse how the ISEW is affected by three social and environmental policies (a carbon tax, income redistribution, and working-time reduction) and explore whether the ISEW is well-suited for the evaluation of these policies. We find that the ISEW grows over time in all scenarios. The strongest improvement over business-as-usual occurs when all policies are combined, with the individual policies mostly increasing the ISEW. However, in the case of working-time reduction, the ISEW decreases compared to business-asusual, which is an unexpected finding. Our results suggest that the ISEW is better than GDP at capturing social and environmental effects, but that it underestimates the environmental costs of economic activity. We argue that a strong sustainability approach, with a comprehensive representation of biophysical boundaries and social thresholds, would provide better guidance to policymakers who aim to achieve sustainable and inclusive wellbeing.