Economic growth and environmental quality

2. Economic growth and environmental quality

A large set of studies has recently shed light on the empirical relationship between economic growth and environmental quality, the purported Environmental Kuznets curve. While the notion of environmental quality is broadly conceived and multidimensional Antle and Heidebrink, 1995 1 , broad measures of environmental quality such as human health and life expectancy are often only partially linked to the actual state of the natural environment Braden and Kolstad, 1991. Fur- thermore, the aggregation of various measures of environmental pressure into a single index of envi- ronmental quality is problematic whenever the single components present, as it has been shown, very different trends and responses to crucial ex- planatory variables Shafik, 1994; Grossman and Krueger, 1995. Policy evaluations often need analyses of single environmental quality indica- tors to address their relationship with economic growth and with policy parameters. For these reasons the concept of environmental quality is not immediately suitable for empirical investiga- tion, where the many dimensions of environmen- tal damage air pollution, soil and water degradation, deforestation, depletion of non-re- newable resources, big-diversity loss are often analyzed separately. Even with this limitation, studies of the link between levels of per capita income and indicators of environmental pressure, such as emissions of those pollutants that immediately impact upon human health and activities e.g. sulfur dioxide, nitrous oxide, suspended particular matters, car- bon dioxide, have revealed clear patterns. The focus of the empirical analyses has been on the relationship between per capita emissions flows of pollutant m it in country i at time t, real per capita well-being, as measured by per capita GDP, Y it and a time trend t: m it = a + b fY it + b 2 t + u it 1 To date, the literature on the EKC has stressed the issue of the choice of the functional form f . in Eq. 1. While such a choice is bound to affect the type and number of turning points in the empirical EKC, estimates of the range of per capita income in which pollution emissions are expected to descend are often significantly differ- ent Grossman and Krueger, 1994; Selden and Song, 1994; Grossman, 1995; Stern et al., 1996. Furthermore, the EKC only describes a rela- tionship between economic growth and specific pollutants, such as suspended particular matters and sulfur dioxide Shafik, 1994; Grossman and Krueger, 1995. For these pollutants the estimated relationship between per capita income and pollu- tion emissions is highly sensitive not only to the choice of functional form but also to the data, that is, the sample of countries used and the sampling duration Grossman and Krueger, 1994; Shafik, 1994; Stern et al., 1996; Roberts and Grimes, 1997. For instance, the explanatory power of a polynomial in GDP per capita ac- counts for a much smaller fraction of per capita pollution emission in high income countries than in low and middle income countries Roberts and Grimes, 1997; Magnani, 1999. For high income countries the best functional form is not quadratic in GDP per capita but cubic. This implies that for very high levels of GDP environmental degrada- tion starts to increase again Grossman and Krueger, 1995; Torras and Boyce, 1998. Finally, the role of factors that evolve in time, e.g. technology, is quite uncertain. Analyses of the evolution in time of the EKCs for poor countries and for rich countries suggest that it is only in high-income countries that pollution emissions have declined over time Roberts and Grimes, 1997; Magnani, 1999. However, even in high-in- come countries the effects of time and economic growth have not been uniform since the early 1970s De Bruyn et al., 1998. The instability of the empirical results, both across time and across countries, shows clearly an omitted variable problem. To solve the mispecifi- cation issue of the EKC, the literature has 1 For instance, in the early 1960s the American Public Health Association suggested four levels of concerns in assess- ing environmental quality: a ensuring survival; b prevention of diseases and accidents; c maintenance of an environment suited to human activities; d preservation of comfort and the enjoyment of living. The American National Wildlife Federa- tion index of environmental quality, firstly published in 1969, is an example of such aggregate measures. searched for factors that can play a particularly important role in determining the environmental impact per unit of economic activity. Such factors include industrial composition of output Gross- man and Krueger, 1995, population density Cropper and Griffiths, 1994; Selden and Song, 1994, openness to trade Hettige et al., 1992; Grossman and Krueger, 1994 Suri and Chapman, 1998, environmental regulation and control Shafik, 1994; Baldwin, 1995. Notwithstanding, a definitive solution remains elusive. In Selden and Song 1994 the coefficient for population density is not statistically significant, although it has the expected negative sign. Likewise, the empirical evidence about the role of international trade and population density on the EKC is rather inconclu- sive Stern et al., 1996. Since the effect of the scale of production is likely to overwhelm the composition effect of changes in its industrial composition Grossman and Krueger, 1995, spe- cial consideration needs to be devoted to environ- mental regulation and control. 2 . 1 . Pollution abatement and the EKC The literature on the EKC has sparked a num- ber of critical positions. As Baldwin 1995 points out, a better understanding of the relationship between environmental quality and development may come from the decomposition of actual pol- lution into two quantities: incipient pollution and abatement. Incipient pollution I it is defined as the level of pollution a country would produce at its current level and composition of output if envi- ronmental costs were zero. Abatement E it is the policy-induced difference between incipient pollu- tion and actual pollution. Using the symbols in- troduced in Eq. 1 for pollution emission in country i at time t, m it = I it − E it . The relationship between environmental quality and per capita income the EKC depends on how growth changes both components. The EKC hy- pothesis assumes that growth impacts upon both components, or I it = IY it and E it = EY it where Y it is a measure of economic well-being in country i at time t. Economic growth positively impacts on incipient pollution I it = IY it , I. \ 0 as the scale effect of output overwhelms the beneficial effect on the natural environment induced by the shift from industrial to post-industrial and service activities characteristic of mature economies the composition effect Baldwin, 1995; Grossman and Krueger, 1995. The virtuous development path from high to low pollution emissions passes through an increase in pollution abatement as per capita income grows EY it , E. \ 0. The envi- ronmental literature explains the sign of this derivative, there being an increase in the demand for environmental quality D it as per capita income increases. In particular, if the income elasticity of demand for environmental amenities is large, the demand for pollution abatement policies is likely to rise with GDP per capita Antle and Heide- brink, 1995. If the income elasticity condition IEC holds, an economy is more likely to experi- ence declining levels of pollution emissions as per capita income increases. By differentiating actual pollution with respect to per capita income we obtain m it Y it = I it Y it − E it D it D it Y it . Focusing on the role of the demand for environmental quality D it and with evidence of no loss of generality, we assume that E it D it = 1 or, in other words, environmental pol- icy is totally accommodating to people’s preferences and the supply side of the economy does not constitute a constraint to the satisfaction of such a demand Baldwin, 1995. Thus m it Y it B 0 if e \ IY it Y it D it where e D it Y it Y it D it is the income elasticity of the demand for environmental quality. If the income elasticity of demand for environmental amenities is high, the combination of changes in the indus- trial composition of output and high demand for environmental quality induced by economic growth guarantees that at advanced stages of development economic growth will be accompa- nied by a sensible decrease in environmental dam- age. The IEC thus provides theoretical foundations for the purported inverted U-shaped curve that describes the link between per capita GDP and environmental quality. Since central to the EKC hypothesis is the role played by pollu- tion abatement, it is legitimate to ask whether a specification such as E it = EY it , which relates environmental expenditure to the mean of the income distribution function, is general enough to encompass cases of economies that differ for a wide range of economic, social and political fac- tors while having the same level of per capita income.

3. Environmental protection policy, redistribution and growth