ENVIRONMENTAL ECONOMICS

Mrinal Kanti Dutta

[email protected]

Department of Humanities and Social Sciences

Indian Institute of Technology Guwahati
Guwahati – 781039
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ENVIRONMENT DEVELOPMENT TRADE-OFF:

The Environmental Kuznet Curve (EKC)

• In the late 1980’s and early 1990’s some economists

(Krueger and others) took up some studies to
explore the relationships between level of economic
development and environmental quality across
countries.

• Plotting the concentration of certain key pollutants

against per capita income of levels of countries
some studies came up with a pattern of scatter
shown in figure-1.
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Pollution The Environmental Kuznet Curve

Early Stage Later Stage

of Economic of Economic
Development Development

Per Capita Income

Figure - 1
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The Environmental Kuznet Curve (EKC)

• This scatter indicated a relationship between per

capita income (PCI) and pollution levels of the
shape of an inverted U.

• Owing to the remarkable similarity of this pattern

to Kuznet’s findings about two decades earlier
between PCI and inequality across countries, this
relationship came to be known as the
Environmental Kuznet’s Curve (EKC).
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The Environmental Kuznet Curve (EKC)

• The associated hypothesis with this curve has been

put as thus:
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ENVIRONMENT DEVELOPMENT TRADE-OFF:

The Environmental Kuznet Curve (EKC)

• The EKC hypothesis points towards a trade-off

between environment and development i.e. it
seems to suggest that underdeveloped countries
will have to forgo environmental quality for the
sake of attaining a higher level of development.

• It further suggests that environmental quality will

be taken care of as developing countries attain
further level of development.
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ENVIRONMENT DEVELOPMENT TRADE-OFF:

The Environmental Kuznet Curve (EKC)
The rationale behind the EKC hypothesis can be
summed up in the following quotation:
“At low level of development both the quantity and intensity
of environmental degradation is limited to the impacts of
subsistence economic activity on the resource base and to
limited quantities of biodegradable wastes. As economic
development accelerates with the intensification of
agriculture and other resource extraction and the take-off of
industrialization, the rates of resource depletion begins to
exceed the rates of resource regeneration, and waste
generation increases in quantity and toxicity. At higher
levels of development, structural and services, coupled with
increased environmental awareness, enforcement of
environmental regulations, better technology and higher
environmental expenditures, result in leveling off and
gradual decline of environmental degradation.” (Panayotou
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ENVIRONMENT DEVELOPMENT TRADE-OFF:

The Environmental Kuznet Curve (EKC)

• Empirical evidence in support of the EKC is not yet

conclusive to establish the observed trade-off or
the hypothesis as a law.

• Studies based on longitudinal data of developing

countries have not come out as yet.

• The possibility of such studies refuting the trade-off

(the way the Kuznet’s inverted U hypothesis was
refuted by such studies that came up in 1970’s)
cannot be ruled out.
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ENVIRONMENT DEVELOPMENT TRADE-OFF:

The Environmental Kuznet Curve (EKC)

• Even if the trade-off was valid for the past

experiences its policy implication for future of
developing countries may not be very useful.

• An obvious policy suggestion which can be drawn

from the trade-off is that developing countries
should focus primarily on growth and economic
development goals without bordering much about
environmental protection in their early stages.

• Because growth itself will take care of

environmental quality at a later stage.
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ENVIRONMENT DEVELOPMENT TRADE-OFF:

The Environmental Kuznet Curve (EKC)

• However, such a strategy can be mistaken (as was

the growth oriented strategy of developing countries
like India in the early planning era without much
effort for reduction of poverty, believing that poverty
was supposed to be mitigated by trickle down effect
of high growth)

• Moreover, it is important to note that many

components of environmental quality such as bio-
diversity are non-reversible if degradation exceeds a
threshold levels.
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ENVIRONMENT DEVELOPMENT TRADE-OFF:

The Environmental Kuznet Curve (EKC)
• In this context it seems that, despite the ambiguity
associated with the concept, sustainable
development would be a better strategy.

• Moreover, a developing country today need not go

through the same course of development on which
the rationale for the EKC hypothesis has been
formulated.

• For instance, countries like India have made the

transition from a primary sector dominated
economy to a service sector dominated economy
without going through the phase dominated by the
industrial sector.
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ENVIRONMENT DEVELOPMENT TRADE-OFF:

The Environmental Kuznet Curve (EKC)
• Such a pattern obviates the need for industrialization
related environmental degradation in the course of
economic development.

• Even if a country needs and chooses to industrialize it

can leap-frog the course of technological advancement
and adopt technologies, which are substantially less
polluting than the technologies used by countries which
industrialized in the past

• The environment-development trade-off might have

existed historically. But it is not inevitable for a
contemporary developing countries to sacrifice
environment quality for the sack of expediting the pace of
development.
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SUSTAINABLE DEVELOPMENT: BACKGROUND

 The ‘Limits to Growth’ Report

 Energy crisis of 1970s precipitated by oil price
jumps
 Market failure in allocation of environmental
resources
 World Commission on Environment and
Development instituted in 1983
 The report ‘Our Common Future’ articulated the
concept
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SUSTAINABLE DEVELOPMENT: DEFINITION

 Development that meets the needs of the present
without compromising the ability of the future
generations to meet their own needs

 Appealing but ambiguous. Some called it

delightfully vague

 Present needs?
 Needs of the future generations?
 Requirements to meet the future needs?

 Difficult to operationalise.
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SUSTAINABLE DEVELOPMENT: ECONOMIST’S

PERCEPTION
Resonates with Economists’ conceptualization of
INCOME, i.e., maximum consumption one can have
in a period while remaining as well off in the end as in
the beginning of the period (Solow)
In that light sustainability has been interpreted as an
obligation to conduct ourselves so that we leave to
the future the option or capacity to be as well off as
we are
Hence sustainability requires that the stock of capital-
manufactured, human and natural, is left
undiminished
This, in turn, needs restricting consumption to save
resources for asset creation and conservation and
protection of the environment
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SUSTAINABLE DEVELOPMENT : Definitions

A requirement to our generation to manage the
resource base such that the average quality of life
we ensure ourselves can potentially be shared by
all future generations” -Asheim (1994)

SD serving multiple goals- economic development,

a better environment and a particular concern for
poor

Two common features of many definitions of SD:

Equity across generations
Equity within generations

Equity vs. efficiency issue

Sustainability and sustainable development
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SUSTAINABLE DEVELOPMENT : Approaches

Two approaches-
Outcome approach
Maintaining the means to generate well-being or
consumption
Outcome approach:
How the economic process directly affects human
well being
Well being is synonymous with utility or welfare of an
individual
Sustainability is the utility of a representative agent in
any period t, U(t) to be non-declining for the rest of
the time from time t* onwards
Defining SD in terms of observable determinants of
utility
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SUSTAINABLE DEVELOPMENT : Approaches

Maintaining the resources available to society to

generate well-being or consumption

Resources consist of physical stocks and the

technology

Four forms of capital:

Man-made or produced capital, Km
Human capital, Kh
Natural capital, Kn
Social Capital, Ks
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SUSTAINABILITY: Weak and Strong

Weak Sustainability Strong Sustainability treats
views manufactured and natural and man made
natural capital to be capital to be complementary
substitutable
So renewable resources to be
Therefore what matters is used only at rates at which
the total stock of these they regenerate. Use of non-
assets renewable should be
minimized.
Monetary valuation of
stocks possible Resource stock have to be
measured in physical units
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EFFORTS AND INDICATORS FOR MONITORING

SUSTAINABILITY

Environmentally Adjusted National Income or

Green NDP (=NDP-Depletion of Natural
Capital-Environmental Damage)

Genuine Savings

Integrated Environmental Economic Accounting

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GREEN NATIONAL ACCOUNTS

 Degradation of environmental capital is like

depreciation of man-made capital

 Subtract from gross income to get net income

 Not doing it is steering with a faulty compass

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GREEN NATIONAL ACCOUNTS

System of National Accounting (SNA) as a

measure of SD

Income as given by Hicks- that portion of the

value of output which could be consumed in any
year without reducing one’s wealth.

Need for adjustment in conventional accounts

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ADJUSTMENTS IN NATIONAL ACCOUNTS

For NR resources, deduct from NNP an amount equal

to the value of annual production (less discoveries)
multiplied by the difference b/w P and MC
For RR, annual production is deducted from annual
growth and then valued using P and MC term
For pollution, amount equivalent to change in stock of
each pollutant multiplied by its marginal abatement cost
Green NNP = NNP- (p1-mc1)•
NR-(p2-mc2) •
R-v(•
S)
 v= marginal cost of abatement for pollution stock S
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GENUINE SAVINGS
• Pearce and Atkinson, 1993

• Compares reinvestment in an economy with

depreciation of both natural and man made capital
GS = S - θm- θn

• Positive genuine saving means that the weak

sustainability norm is fulfilled. (natural and man
made capital are perfect substitutes)
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ISSUES FOR SUSTAINABLE DEVELOPMENT

• Economic growth is needed and desirable.

• Can needed growth be attained?

• What stress on environment would it put?

• How to make it green growth?

• How to ensure sustainable development?

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POVERTY and Environmental Degradation

 Poor people, almost always, bear the burnt of

environmental degradation

 Poverty and environmental degradation are often

caught in a mutually reinforcing downward spiral

 If the spiral is to be arrested, addressing poverty

alongwith environment oriented policy will be
useful
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POVERTY and Environmental Degradation

 For appropriate policy formulation, examining the

causality between poverty and environmental
degradation is important

 Poor usually don’t possess means and power to

damage the environment to the point that will
unleash the spiral

 Greed and rent-seeking by the rich and powerful

section are responsible for such degradation of
environment
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TRADE and ENVIRONMENT

 Two broad categories of issues-

 Those arising from the consequences of

differences in environmental regulations across
countries

 Others concerned with management of global

public bad
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TRADE and ENVIRONMENT

 International trade helps a country to specialize

in production of specific commodities
(comparative cost advantage)

 Relative endowment of different types of

natural resources plays an important role in
determining the pattern and volume of trade

 Pattern and volume of trade affects the

environment nationally and globally
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TRADE and ENVIRONMENT

 Sources of international trade determining

comparative cost advantage of countries are-
 Differences in labour productivity
 Relative availability of factors of production
including natural resources

 Differential environmental standards or

regulations across countries may also affect
pattern and spatial distribution of trade, and
thereby environment
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TRADE and ENVIRONMENT

 International trade → Greater production and

consumption → environmental problems (social
cost)
 Market failure (external costs are not captured
in price)
 Lower price → higher demand and production
(more than socially optimal level)
 Appropriate regulation is required to curtail
output
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TRADE and ENVIRONMENT

 Environmental regulation and
specialization in production

 Case of developed and developing

countries

 Pollution haven hypothesis

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Global Public Goods and Bads

 Public bads affect all people in a locality
adversely and no one can be excluded
 Local and global public goods and bads
 Individual countries may not have enough
incentives to conserve the goods and limit
use of bads
 Tendency to ‘free ride.’
 Not enough actions and ‘tragedy of
commons’
 Kyoto, Montreal protocol, etc.