The Green RICE-MED: Integrating Natural Capital and Ecosystem Services into a Regional IAM for the Mediterranean Basin

Natural capital is a fundamental but often undervalued determinant of economic activity and welfare, especially in climate-vulnerable regions where ecosystems, water, land, and energy use are tightly interconnected. In this paper we develop Green RICE-MED, a regional integrated assessment model for the Mediterranean basin that extends the RICE framework by incorporating natural capital, ecosystem services, and the energy sector into the analysis of climate–economy interactions. The model is designed to capture the structural heterogeneity of Mediterranean economies, which differ markedly in income levels, energy use, exposure to climate change, and dependence on natural capital. Relative to standard IAMs, Green RICE-MED introduces natural capital as a productive input alongside physical capital, labour, and energy services, and includes ecosystem services in welfare through both use and non-use values. It also retains an explicit representation of the energy sector. Climate change affects not only current output, but also the evolution of natural capital over time, generating persistent and cumulative macroeconomic damages. We calibrate the model using country-level data for Mediterranean economies to assess the implications of climate policy in a region characterized by high vulnerability and uneven development. Results show that accounting for natural-capital degradation and ecosystem-service losses leads to more stringent optimal mitigation and a higher social cost of carbon than in the standard RICE-MED framework. The analysis also reveals substantial regional asymmetries: economies that depend more heavily on natural capital face larger output and welfare losses under business as usual, but also derive the greatest benefits from stronger mitigation.