The Internalisation of Environmental Capital Stocks into an Aggregate Cobb-Douglas Function

Following Solow's (1986) conceptual exposition, a Cobb-Douglas production function which contains environmental capital as an explicit argument and displays constant returns to scale, is illustrated with Australian data. An important aspect of the illustration is the estimation of stock values for environmental capital analogous to those for manufactured capital. When sustainability and the non-substitutability of at least some components of environmental capital are recognised, it is possible to show that all rents owing to the entire stock of environmental capital need to be set aside as a depreciation allowance. This inference has implications for regional and national policy formulation.