Ch. 20 Confronting the Ch. 20 Confronting the Environmental Kuznets Curve Environmental Kuznets Curve

by Susmita Dasgupta, Benoit Laplante, by Susmita Dasgupta, Benoit Laplante, Hua Wang, & David WheelerHua Wang, & David Wheeler

IntroductionIntroduction Environmental Kuznets posits inverted-U relationship Environmental Kuznets posits inverted-U relationship

between pollution (dependent variable) and economic between pollution (dependent variable) and economic development (independent variable).development (independent variable).

Grossman and Krueger (1993) named the EKC in honor Grossman and Krueger (1993) named the EKC in honor of Simon Kuznets who found a similar relation b/w of Simon Kuznets who found a similar relation b/w income inequality and economic development.income inequality and economic development.

Usually cross section regressions are used. Turning Usually cross section regressions are used. Turning point is around $5,000 to $8,000 in per capita income.point is around $5,000 to $8,000 in per capita income.

IntroductionIntroduction Message: “Grow first, then clean up.”Message: “Grow first, then clean up.” Numerous critics of EKC theory and results.Numerous critics of EKC theory and results. But new results suggest the level of the curve is actually But new results suggest the level of the curve is actually

dropping and shifting to the left.dropping and shifting to the left. Stakes are high. Many countries per capita income is Stakes are high. Many countries per capita income is

below the turning point. EKC implies increase in below the turning point. EKC implies increase in pollution first before turning.pollution first before turning.

Some believe in “race to the bottom” : firms relocate in Some believe in “race to the bottom” : firms relocate in countries desperate for jobs & willing to tolerate pollutioncountries desperate for jobs & willing to tolerate pollution

Theory & MeasurementTheory & Measurement Theory shows EKC can result if Theory shows EKC can result if

– Marginal utility of consumption is constant or Marginal utility of consumption is constant or fallingfalling

– Disutility of pollution is risingDisutility of pollution is rising– Marginal damage of pollution is risingMarginal damage of pollution is rising– Marginal cost of abating pollution is risingMarginal cost of abating pollution is rising

Theory & MeasurementTheory & Measurement Lopez (1994) shows EKC’s existence depends on preferences and Lopez (1994) shows EKC’s existence depends on preferences and

production technology production technology – Nonhomothetic preferencesNonhomothetic preferences– Degree of risk aversionDegree of risk aversion– Elasticity of substitution in production b/w pollution & conventional Elasticity of substitution in production b/w pollution & conventional

inputsinputs– Corruption reduces environ. qualityCorruption reduces environ. quality– Data comes from Global Environmental Monitoring System (GEMS) by Data comes from Global Environmental Monitoring System (GEMS) by

United Nations on commonly regulated air and water pollutantsUnited Nations on commonly regulated air and water pollutants– Research is mixed. Stern (1998) argues: EKC relation only found for Research is mixed. Stern (1998) argues: EKC relation only found for

suspended particulates & sulfur dioxide. suspended particulates & sulfur dioxide.

Theory & MeasurementTheory & Measurement Empirical work proceeding in several directionsEmpirical work proceeding in several directions

– 1) improve data collection in developing countries1) improve data collection in developing countries– 2) improve data on toxic emissions2) improve data on toxic emissions– 3) curvature of EKC; higher order polynomial3) curvature of EKC; higher order polynomial– 4) compare time series studies with cross section 4) compare time series studies with cross section

studies.studies.

How the Environmental Kuznets How the Environmental Kuznets Curve Can Become Lower & FlatterCurve Can Become Lower & Flatter

The Primary Role of Environmental RegulationThe Primary Role of Environmental Regulation– Several factors can affect pollution levels:Several factors can affect pollution levels:

» Scale or sectoral composition of outputScale or sectoral composition of output

» Changes in technologyChanges in technology

» RegulationRegulation

– Regulation is the dominant factor: 3 reasonsRegulation is the dominant factor: 3 reasons» 1) pollution gets higher priority after basic health and education are 1) pollution gets higher priority after basic health and education are

providedprovided

» 2) more income for enforcement 2) more income for enforcement

» 3) more income and education empowers local communities3) more income and education empowers local communities

How the Environmental Kuznets How the Environmental Kuznets Curve Can Become Lower & FlatterCurve Can Become Lower & Flatter

Economic LiberalizationEconomic Liberalization– Elimination of gov’t subsidies often has Elimination of gov’t subsidies often has

environmentally beneficial effects because they occur environmentally beneficial effects because they occur in pollution intensive industries like steelin pollution intensive industries like steel

– State owned plants in China have higher marginal State owned plants in China have higher marginal abatement costs than private firmsabatement costs than private firms

Pervasive informal regulationPervasive informal regulation– Community action can workCommunity action can work

How the Environmental Kuznets How the Environmental Kuznets Curve Can Become Lower & FlatterCurve Can Become Lower & Flatter

Pressure from market agents.Pressure from market agents.– Firms stock prices are affected by good and bad Firms stock prices are affected by good and bad

environmental news about the companyenvironmental news about the company Better Methods of Environ. RegulationBetter Methods of Environ. Regulation

– Developing countries are moving away from command Developing countries are moving away from command and control approach to market-oriented forms of and control approach to market-oriented forms of regulation as used in the U.S.regulation as used in the U.S.

How the Environmental Kuznets How the Environmental Kuznets Curve Can Become Lower & FlatterCurve Can Become Lower & Flatter

They are sanguine but have cautionary notes: four They are sanguine but have cautionary notes: four plausible concernsplausible concerns– 1) Will countries need to suffer lower environ quality 1) Will countries need to suffer lower environ quality

in the short run?in the short run?– 2) Risk of race to bottom in globalization2) Risk of race to bottom in globalization– 3) What about toxics?3) What about toxics?– 4) Building regulatory capacity4) Building regulatory capacity

The EndThe End