Common Tragedies

Thoughts on Environmental Economics

The limits of the environmental Kuznets curve?

Posted by Daniel Hall on September 21, 2007

National Geographic News has a series of photos of the 10 most polluted places on Earth. Like they say, a picture is worth a thousand words, and it’s hard not to look and think, “There, but for the grace of God environmental Kuznets curve, go we.” These places are almost all in poor countries, and the environmental Kuznets curve seems to promise that things will get better once people get richer, as happened in the United States. But I wonder if there are not limits.

The environmental Kuznets curve (EKC) hypothesis posits an empirical U-shaped relationship between pollution and income (i.e. per capita GDP).* Although the research literature has tried to stay away from theoretical models and focus on the empirics, the popular explanation is that countries start out poor but with a relatively pristine environment, go through a phase of economic growth and pollution, and then once they get rich enough develop a taste for environmental quality and so clean up, thus generating the U-shaped relationship.

This relationship is found to hold empirically for local pollutants — indoor air pollution (smoke) or fecal coliform (crap) in water — and is generally observed for local-regional pollutants like NOx or SOx, but the evidence becomes more mixed as pollutants become more spatially dispersed. (See the tables at the end of this paper for a review of the literature findings.) Once you get to CO2, a global pollutant, the empirical evidence is very mixed indeed; most studies suggest that if there is a U-shaped relationship, the peak is beyond reasonable levels of income (well beyond current U.S. per capita income of ~$42,000 — which is obviously far higher than the global figure). As Free Exchange noted last week, there are logical arguments for why the EKC relationship might not hold for global pollutants, implying that rising incomes may do much less to help with climate change than some hope.

But there is also a possibility that the EKC relationship may not describe a sustainable path to reducing all local pollutants either. As this succinct definition explains, economists — to the degree that they theorize about the reasons for the EKC relationship — think of it as being composed of 3 effects: scale, composition, and technique. Scale pushes you up the curve: you get richer, produce more, and have more pollution. Technique pulls you down: you increase production efficiency, install pollution controls, and generally develop cleaner ways of doing the same things. The composition effect is uncertain: you change the mix of economic activity as income changes. In practice this seems to have played itself out as wealthier nations having shifted from manufacturing into service- and knowledge-based economies, while poorer countries have been industrializing rapidly — both processes aided by increased international trade and investment. Thus composition is a part of driving some countries up the curve and of helping other countries move back down. Suri and Chapman (1998) [gated] found that this effect was an important component of the EKC relationship.

But if composition effects are a driving some of the empirically observed EKC relationship, then we are playing a game where someone is going to get left holding the short end of the stick hosting the manufacturing plants. Vapi, India may be able to look forward to a day where it is wealthier and cleaner. But until we start literally offshoring — or offworlding — our mining and manufacturing activities, or we completely lose our appetite for manufactured goods, it seems likely that someone, somewhere is going to have to live with the consequences.

*In fact originally Simon Kuznets described this U-shaped relationship between income inequality and per capita GDP; it was Grossman and Krueger who extended this idea to pollution.

3 Responses to “The limits of the environmental Kuznets curve?”

  1. greg claxton said

    This may be me misunderstanding, but one problem I have with EKC is that it seems like an economic explanation of a primarily political phenomenon. And maybe this isn’t a problem with the more technical underpinnings of it, so much as the easy popularizations that you see from time to time, but your explanation seems like an argument that rising incomes allow different preferences to be expressed in the marketplace. It seems to me, though, that the primary thing that actually moves environmental quality, at least over the past forty years, is government regulation (including, obviously, market-based regulations).

    It seems easy to incorporate politics into an understanding of the EKC (and this was my original understanding of it), and maybe my problem is that it’s simply unstated in the kind of mid-level explanation you’re giving. I don’t know if this is my problem or yours. :)

  2. Daniel Kramer said

    Isn’t it true that many studies on the EKC are based on cross-sectional rather than time-series data. That is, results are based on an evaluation of many countries at different points in their development (i.e. per capita income). I would enjoy hearing some speculation as to why a time-series approach might suggest something different.

  3. Evan Herrnstadt said

    Well, to address time-series vs. cross-section: Like many economic growth studies, we are looking at a group of countries with different unobserved institutional, cultural, and geographic conditions, with no real way to control for these (obviously a nation fixed-effects regression is out of the question). So we have to assume that (1) all nations face the same conditions in pollution abatement and (2) the situations present among different countries are completely independent of one another.

    I think Daniel addresses this implicitly when he discusses the “odd man out” aspect of the composition effect. However, I think we can also see this in a more continuous, marginal manner. For nations like the US or Western Europe, it has become easy with better transport and communications to dump these dirty goods on developing nations in Asia and Latin America. However, as more nations move toward a “post-industrial” level of income, it remains to be seen whether there will be enough places left to absorb the existing dirty tastes of the US/Western Europe/Japan, along with the emerging burden of China, Korea, India, Argentina, Brazil, et al. So I think it’s going to be harder and harder to export pollution as more countries try to do it.

    Muradian, et al (2001) provides a cursory initial analysis of the concept of environmental terms of trade, i.e., the ratio of embodied emissions in imports to those in exports.

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