Analyzing the indirect effects of nature-related shocks on the economy: methodological approaches and insights

This paper defines nature-related shocks as nature degradation and other changes in the availability and quality of ecosystem services (e.g., soil degradation and biodiversity loss) and discusses ways to introduce them into frameworks of shock propagation, with particular attention to their spillover effects (for example across regions and sectors). We think of nature-related shocks as an extension of “classic” environmental shocks (such as changes in weather and climate, and natural disasters) which have been considered in the existing literature to some degree. We first review approaches commonly used in the literature to investigate how shocks generate cascading e!ects throughout the economy. We focus on firm-level supply chain analysis, local projections, structural vector autoregressive models and production network models. We then discuss options to integrate nature-related shocks into these existing frameworks, as well as the main challenges and ways forward in this context