UNIT 14 GROWTH AND ENVIRONMENT*

Sustainable
Development

Structure
14.0 Objectives
14.1 Introduction
14.2 Income-Environment Relationship: The EKC
14.2.1 Growth - Environment Controversy
14.2.2 Environmental Quality Indicators
14.3 Explanations to EKC
14.3.1 Income Elasticity of Demand
14.3.2 Scale-Technology – Composition Effects
14.3.3 Technological Progress
14.3.4 R&D
14.3.5 Innovation and Adoption
14.3.5 Organisational Change
14.4 International Trade
14.4.1 Foreign Direct Investment
14.4.2 Globalisation
14.4.3 Race to Bottom
14.5 Market Mechanism
14.5.1 Information Accessibility
14.5.2 Regulation
14.5.3 Property Rights
14.5.4 Structural Change
14.5.5 Socio-Political Regime
14.6 Let Us Sum Up
14.7 Key Words
14.8 Some Useful Books and References
14.9 Answers/Hints to Check Your Progress Exercises

14.0 OBJECTIVES
After reading this unit, you will be able to:

• discuss the relationship between ‘income and environment’ in terms of

the EKC (Environmental Kuznets Curve) hypothesis;
• outline the issue behind the growth-environment controversy;
• establish the relevance of the EKC hypothesis for the three major
environmental quality indicators;

230 *
Prof. Soumyananda Dinda, University of Burdwan, West Bengal.
• explain the factors contributing to the differing trends in the EKC; Growth and
Environment
• distinguish between the ‘displacement, pollution haven and factor
endowment’ hypotheses in the context of international trade;
• describe the factors which links trade with changing environmental
standards in high and low income countries; and
• analyse the factors which needs to be efficiently tackled in order to have
a ‘market mechanism’ capable of preventing environmental degradation.

14.1 INTRODUCTION
The nature of relationship between economic growth and environmental
quality has become the focus of increased attention in the literature of
development and environmental economics. The issue is one of whether
environmental degradation associated with economic growth increases
monotonically, or increases in the beginning but declines in the later stages,
etc. More generally, the interest is to know whether the trend in the decline of
environmental quality once it begins is continuous or whether there could be
further upward turns in it. Thus, while economic growth through
industrialisation brings higher incomes and well-being, it also acts as a
magnifier of environmental degradation. The linkage between environmental
quality and economic growth has evoked much interest particularly since the
1990s with the publication of World Development Report, 1994. The report
presented cross-sectional evidence across countries on the relationship
between different indicators of environmental quality and per capita national
income. Two major explanations offered by this report are:
i) use of environment as a major source of input and a pool for waste
assimilation increases at the initial stage of economic growth, but as a
country grows and becomes richer, structural changes take place
resulting in greater environmental protection; and

ii) viewed as a consumption good, as an economy grows, the status of

environmental quality changes from a luxury to a necessary good.

Thus, with rising per capita income levels, phenomena like: (i) structural
economic change and transition, (ii) technological improvements, (iii) rise in
public spending on environmental research and development (R & D), etc.
are considered to be important in determining the nature of relationship
between economic growth and environmental quality. The study of such a
relationship therefore relates to the issue of the ‘impact of economic growth
on environment’.

14.2 INCOME-ENVIRONMENT RELATIONSHIP:

THE EKC
The linkage between environmental quality and income has evoked
considerable discussion since the pioneering work of Grossman and Krueger
(1991). Several other studies have documented an inverted U-shaped
relationship between environmental degradation and income. The common 231
Sustainable point of all these studies is the assertion that environmental degradation
Development
initially increases, but after reaching a maximum level, as the economy
continues to grow, it declines. This systematic inverted-U relationship has
been called as the Environmental Kuznets Curve (EKC). The logic of EKC
hypothesis is that environmental degradation rapidly rises in the early stage
of economic growth primarily because the society attaches a higher priority
to growth of material output and income over the demand for clean air and
water. The awareness of environmental problem being low at this stage,
environment-friendly production technologies are either not used or not
available. Typically, income growth at this stage takes place through
expansion of agriculture and other intensive resource extracting activities
causing an enormous pressure on environment and increase in pollution.
Beyond a threshold level of development a high and rising income level
induces people to value environmental quality. This awareness induces
qualitative changes in the economy in favour of: (i) less resource intensive
production; (ii) stricter enforcement of environmental regulations and
standards; etc. In sum, as Arrow (1995) puts it: the story of EKC hypothesis
is a narration of the process of evolution of a clean agrarian economy to a
polluting industrial economy and ultimately to a clean service economy.

14.2.1 Growth - Environment Controversy

Before 1970, it was believed that, as an economy grew, the consumption of
raw materials, energy and natural resources would grow almost at the same
rate (i.e. at the steady state rate). In the early 1970s, the Club of Rome's
Limits to Growth view expressed concern on the continued availability of
natural resources. Briefly, the environmental economists of the Club of Rome
argued that the finiteness of environmental resources would prevent
economic growth and therefore urged for a steady state (i.e. zero rate of
growth) growth to avoid the drastic ecological consequences in future.

By 1990s, it was realised that economic growth degrades environmental

quality. Beckerman (1994), in contrast, suggested that the economic growth
by itself could be a panacea for environmental degradation. Supporting this
view, Panayotou (1993) also claimed that economic growth could be a
precondition for environmental improvement, particularly in developing
countries. The essential argument was that if a country in its course of
development is able to reach a high enough income stage, it will be willing
and able to afford an income generation strategy leading to improved
environment. This is in direct conflict with the pessimistic view of the Club
of Rome viz. global economic development will be unsustainable unless a
zero growth rate (or a steady state strategy of development) is pursued. A
bridge between these two opposite views about the future of the world
ecology was the idea of a development path which provided a stage-based
link between environment and economic growth. This notion of development
path suggested that in the early stage(s) of economic growth a poor society
will prefer and strive for a fast growth of output and income at the cost of
extensive environmental degradation, whereas, once a threshold level of
development is crossed, the same society will attach a much greater value to
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the environmental quality and hence take measures to ensure improvement of Growth and
Environment
the environment.

Empirical data on various pollutants started becoming available from the

early 1990s. Major agencies publishing such data are: (i) Global
Environmental Monitoring System (GEMS); (ii) the Oak Ridge National
Laboratory (ORNL); (iii) World Resources Institute (WRI); (iv) International
Energy Agency (IEA); (v) United Nations Environment Programme (UNEP);
(vi) Compendium of the OECD; (vii) FAO’s Production Yearbook; (viii)
WHO’s Health database; etc. Such data availability induced several
researchers to empirically test the validity of the income–environment
relationship. The first empirical study to appear was a paper by Grossman
and Krueger (1991), published by the National Bureau of Economic Research
(NBER). Being the first, it became a landmark in a series of studies which
appeared later. The next two empirical EKC studies which appeared
independently are: (i) a discussion paper for the International Labour
Organisation (Panayotou in 1993), and (ii) the World Development Report
(1994). Thus, it was the Grossman and Krueger’s study (published in 1993)
that first pointed out an inverted-U relationship between pollutants and
income-per-capita. However, since this bear a close resemblance to Kuznets’
inverted-U relationship between income inequality and economic
development, Kuznets’s name was later attached to the inverted-U
relationship between pollution and economic development. In light of this,
from 1990s onwards, the Kuznets Curve took on a new existence becoming a
vehicle for describing the relationship between pollution and income. In fact,
Kuznets had published that the relationship between per capita income and
income inequality would be an inverted U-shaped one in 1955. As per
Kuznets, as the per capita income increased, income inequality would also
increase at first but then start declining beyond a turning point. The
distribution of income would thus be more unequal in early stages of growth
but later, as economic growth continues, it would move towards greater
equality. Thus, the relationship between income per capita and income
inequality can be represented by a bell-shaped curve. This observed empirical
phenomenon is what is popularly known as the Kuznets curve.

14.2.2 Environmental Quality Indicators

In the absence of a single environmental indicator, literature distinguishes
three main categories of environmental quality indicators viz. (i) air quality
indicator; (ii) water quality indicator; and (iii) other environmental quality
indicator. We shall now note briefly how the environmental curve for each
one of these indicators behaves itself compared to the postulation by Kuznets.

The measures of urban and local air quality indicators generally show an
inverted-U relationship with income. Significant EKCs have been observed
mainly for local air pollutants like SO14, SPM, NOx and CO (all of which are
energy related). Selden and Song (1994) focussed on urban air concentrations
and observed a peak at lower income levels rather than in terms of total per
capita emissions. In contrast, for the global environmental indicators like CO2
emission, it was observed that municipal waste and energy consumption
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Sustainable either increased monotonically with income or else has high turning points
Development
with large variation. Generally, the literature does not find much evidence in
support of EKC for air pollutants but recent studies observe that CO2
emission increases monotonically with rising income. Several studies have
reported finding evidence of N-shaped curve for some indicators i.e. they
visualised a inverted U-curve initially but beyond a certain income level the
relationship (between environmental pressure and income) again turned
positive, making it a N-shaped curve. In other words, there can be a
secondary turning point at which the levels of ambient air pollution could
increase. Thus, the EKC may be a short run phenomenon for local air
pollutants and may not hold in the long run.

For water quality indicators also, the empirical evidence on the validity or
otherwise of the EKC hypothesis is mixed. Three main categories of
indicators are generally used as measures of water quality viz. (i)
concentration of pathogens in water, (ii) amount of heavy metals and toxic
chemicals in water and (iii) measure of deterioration of the oxygen content in
water.

Studies focused on ‘other environmental indicators’ mostly do not support

the EKC hypothesis. These studies observe that environmental problems
having direct impact on the population (e.g. access to sanitation and safe
drinking water) tend to improve steadily with economic growth. On the other
hand, environmental problems having indirect impact on people (e.g.
municipal solid wastes, CO14 emission) do not show a tendency to decline.
The evidences on the EKC relationship in case of deforestation are also
highly conflicting.

Check Your Progress 1 [answer within the space given in about 50-100
words]

1) The present concern about the relationship between rising economic

growth and environmental degradation can be traced to which particular
event? What are the two major explanations offered in this regard?

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2) Give examples of likely determinants which needs to be focused upon

for describing the phenomenon of the ‘impact of economic growth on
environment’.

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3) State the underlying logic behind the EKC hypothesis? Does the EKC Growth and
Environment
provide for a second turn in its declining trend in the improving
environmental quality?

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4) What is meant by the ‘steady state rate of growth’ or strategy?

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5) What is the compromising idea of a ‘development path’ propounded to
bridge the difference in perspectives of two different schools of thought?

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6) How did the name of Kuznets come to be associated with the

environmental curve i.e. the EKC?

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7) Does the available evidence supports the EKC for air and water quality
levels unambiguously?

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Sustainable
Development 14.3 EXPLANATIONS TO EKC
As the income of an economy grows over time, initially emission level rises,
reaches a peak and then starts declining after a threshold level of income has
been crossed. It thus describes a development trajectory for a single economy
growing through different stages over time. Individual countries, in their
process of development, generate income and emission which, ceteris
paribus, follow the EKC. Empirically, this development trajectory has been
observed in cross-country cross-sectional data, which represents countries
belonging to different (low, middle and high) income groups corresponding
to their respective emission levels. Assuming all countries follow one and the
same EKC, at any point of time, it is observed that poor countries are mostly
at the rising part of EKC, developing countries are at the part of the EKC
where it is approaching the peak (or about to cross it) and the rich countries
are in the falling part of the EKC. Thus, several factors could be responsible
for shaping the EKC. The various explanations for these differing trends are
offered as follows.

14.3.1 Income Elasticity of Demand

The most common explanation of the inverted U-shape is in terms of income
elasticity of demand for environmental quality. As income grows, people
achieve a higher standard of living. They start caring more about the quality
of environment they live in and demand its improvement. Thus, the income
elasticity of environmental quality demand is invoked in the literature as the
main reason for the reduction of pollution (emission) levels with rising
income. This implies that people attach increasing value to environmental
amenities when a country achieves a sufficiently high income level. This
would be reflected through defensive expenditures, donations to
environmental organisations and/or use of less environmentally damaging
products and technologies. OECD data on public R&D expenditure for
environmental protection confirms this.

Consumers with higher incomes would not merely be willing to spend more
for green products. They can also create pressure for environmental
protection regulations and institutional reforms such as promulgation of
environmental legislation and creation of market-based incentives to reduce
environmental degradation. Systematic efforts for reducing pollution in high-
income countries has been observed with economic growth accompanying
improvements in many social indicators, particularly income inequality. Such
indicators include education and information accessibility that shift social
preferences away from consumption of private goods toward public goods
like environmental amenities.

14.3.2 Scale-Technology – Composition Effects

Economic growth is observed to affect the environmental quality through
three different channels viz. scale, technology and composition effects. Since
increasing output requires more inputs, and thus more natural resources are
used up in production process, growth exhibits scale effect on the
236
environment. This generates more wastes and emissions as by-products and Growth and
Environment
they in turn, degrade environmental quality. Economic growth, on the other
hand, may have a positive impact on environment through a composition
effect. As income grows, the structure of the economy tend to change in a
way that the share of cleaner activities in GDP is gradually raised. For
instance, environmental degradation tend to increase as the structure of the
economy changes from rural to urban, or agricultural to industrial, and then it
starts declining with another structural change taking place due to the gradual
replacement of energy intensive industrial activity with knowledge based
technology-intensive industrial activity. Technological progress thus plays a
major role in this process of transformation by helping in the substitution of
dirty and obsolete technologies by cleaner ones. This is called the
technological effect of economic growth. The EKC suggests that the negative
impact on the environment of the scale effect tends to prevail in the initial
stages of growth, but eventually gets outweighed by the positive impact of
composition and technological effects that help reduce emission levels.

14.3.3 Technological Progress

Generally, technological progress leads to greater efficiency in the use of
energy and materials. Thus, a given amount of goods can be produced with
successively reduced burdens on natural resources and environment. One
aspect of this progress may be better and more efficient reuse and recycling
of materials. Coupled with greater efficiency in use, reuse and recycling can
yield large resource savings. There is a growing trend among industries to
reconsider their production processes in order to take environmental
consequences of production into account. This concerns not only traditional
technological aspects of production but also new organisation of production
and design. Technological changes associated with the production process
also result in changes in the input-mix of materials and fuels. International
trade facilitates diffusion of technology which otherwise prevents economic
late-comers by requiring the same levels of materials and energy inputs (per
unit of production) that the industrialised countries needed in the beginning.
Thus, trade allows developing countries to dive through the EKC.
Munasinghe (1999) suggests that developing countries may learn from the
experiences of industrialised nations and restructure growth and development
to tunnel through any potential EKC - thereby avoiding going through the
same stages of growth that involve relatively high (and even irreversible)
levels of environmental harm.

14.3.4 R&D
As income grows, people can adopt better and efficient technology that
provide cleaner environment. This preferential behaviour of people is
reflected through their income elasticity. The income elasticity of public
research and development funding for environmental protection was found to
be positive in the case of 19 OECD countries over the period 1980-1994.
This indicates the key role of such public investments for environmental
improvements in reducing environmental degradation. The effect of
economic growth on pollution/emissions differs substantially among high-
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Sustainable income countries. Relative income levels and existing political framework (in
Development
which policy decisions are taken) determine the emergence of downward
sloping segment of EKC. This depends on the adoption of new technology.

14.3.5 Innovation and Adoption

New technologies, unambiguously, improve productivity but create potential
dangers to the society through risk from new hazardous wastes. Such
negative externalities are unknown in the early phase of diffusion of
technology, while in later stages, regulation is brought-in to address it. Once
the technology is regulated, it stimulates the gradual phasing out of existing
technology. Thus, a cyclical pattern emerges in which diffusion effect in the
first phase gets regulated in the second phase and finally are phased out in the
third phase giving rise to adoption of next generation of technologies with the
cycle repeating itself successively. Thus, an inverted-U shape can be
observed with reference to each technology. Through this pattern of
innovation, income growth and pollution over-cycles, a sequence of
Environmental Kuznets Curves emerge relating to each technology. This may
produce an envelope of EKCs, which may again be of an inverted-U or N-
shaped or inverted-L shaped curve. As we saw above, the Environmental
Kuznets Curve hypothesis is confirmed with empirical evidence for many
pollutants although the earlier EKC studies established that for some
pollutants it follows an N-shaped relationship with income. Thus, for some
pollutants, there can be different turning points. This implies that over a
certain period, during which income grows, one pollutant may decline but
another may rise due to adoption of new technology.

14.3.6 Organisational Change

Improved technology not only significantly increases productivity in the
manufacture of old products but it also aids the development of new products.
There is a growing trend among industries to reconsider their production
processes thereby taking the environmental consequences of production into
account. This concerns not only traditional technological aspects but also the
organisation of production and the design of products. Technological changes
associated with the production process would also result in changes in the
input-mix of materials and fuels. In this, material substitution is an important
element which may result in lower environmental impacts. Such economy-
wide reforms often contribute comprehensively to the economic, social and
environmental gains. The EKC approach seeks to relate the stages of
economic development of a country to phases of environmental degradation.
Developing countries could learn from the experiences of industrialised
nations and restructure their growth and development strategies to avoid
going through the same stages of growth that involve relatively high (and
even irreversible) levels of environmental harm. However, it still may not be
clear which environmental policies would be effective to reduce pollution.
However, all studies which investigated EKCs have hinted at the importance
of policy implications in this respect.

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 Growth and
14.4 INTERNATIONAL TRADE Environment

International trade is an important factor that helps to explain the relationship

between environmental quality and economic growth. Environmental quality
could decline through the scale effect as increasing trade volume (especially
export) would expand the size of the economy thereby increasing the extent
of pollution. Thus, ceteris paribus, trade might be a cause of environmental
degradation. Trade may be good for environment as well through the
composition and technological effects. As income rises through trade,
environmental regulation is tightened. As a result, pollution reducing
innovation gets promoted. It is hypothesised that polluting industries
concentrate in developing countries with low environmental standards. The
differences in the consumer preferences for a cleaner environment in rich and
poor countries induce these two hypotheses.

It is observed that changes in the structure of production in developed

economies are not accompanied by equivalent changes in the structure of
consumption. This could be explained by the EKC, which actually record the
shifting of dirty industries to less developed economies. As Rothman (1998)
speculates, what appears to be an improvement in environmental quality may
in reality be an indicator of increased ability of consumers in wealthy nations
to distance themselves from the environmental degradation associated with
their consumption. The mechanisms through which such distancing takes
place include both moving sources of pollution away from the people and
moving people away from pollution sources. Thus, in general, the
phenomenon of distancing may be a possible source of EKC results. Hettige
et al (1994) observe that toxic intensity grew rapidly in high-income
countries during the 1960s but this pattern was sharply reversed during the
1970s and 1980s, after the advent of stricter environmental regulations in the
OECD countries. Concurrently, toxic intensity in LDC manufacturing grew
quickly. This is what is referred to in the literature as the displacement
hypothesis. Analysis of the composition of international trade reveals that
manufacturing goods exporting countries tend to make higher energy
consumption. They find the poor and rich countries to be net importers and
net exporters of pollution-intensive goods respectively. Therefore, the
inverted U-shaped EKC curve might partly be the result of changes in
international specialisation under which poor countries engage in dirty and
energy intensive production while rich countries specialise in clean and
service intensive production, without effectively any change in the overall
consumption patterns.

A polluting activity in a high-income country normally faces higher

regulatory costs than its counterpart in a developing country. Under these
circumstances, the pollution intensive industries will have a tendency to
migrate to countries with weaker environmental regulations. This is referred
to as the Pollution Haven Hypothesis (PHH). In other words, the PHH
basically suggests that countries having stricter environmental standard will
lose all their dirty industries to poor countries having poorer environmental
standards. On the contrary, the factor endowment hypothesis (FEH) asserts
that under free trade the differences in endowments (or technology) 239
Sustainable determine trade between two countries. Under this view, capital-abundant
Development
countries tend to export capital-intensive goods, regardless of differences in
environmental policy. According to the FEH, polluting industries will first
concentrate in affluent countries, which also tend to be capital abundant. This
is because polluting industries are typically also capital intensive and thus
affluent countries have a comparative advantage in these industries. Thus, the
differences in environmental policy and differences in factor endowments
might jointly determine the comparative advantage in trade. With this, the
FEH and PHH counteract and offset each other. Thus, the basic
characteristics of a country and its dominating comparative advantage
determines how trade liberalisation influences its sectoral composition and
consequently environmental outcomes. Thus, the three basic factors which
links trade with changing environmental standards in high and low income
countries are the following.

14.4.1 Foreign Direct Investment

Most of the developing countries rely on technology transfer through foreign
direct investment from developed countries as a primary means of technology
acquisition. Thus, developing countries can be said to provide a ‘pollution
haven’ if they set environmental standards below their efficiency levels in
order to attract foreign investment. However, increased global eco-
consciousness, and linking of trade and investment with environmental
issues, has the potential to disrupt these investments flows.

14.4.2 Globalisation
Globalisation could trigger the environmental ‘race to bottom’, in which
competition increases for investment and jobs. In fact, ‘the bottom’ rises with
economic growth as the poor economies improve their environmental quality
with increase in investment, income and employment. Thus, globalisation is
compatible with pollution reduction. Economic globalisation is thus a driving
force for global economic growth notwithstanding the fact that opinion is
divided about the benefits of this process. Open economies, however, raises
the issue of potential conflicts between two powerful current trends viz. (i)
the worldwide acceptance of market oriented economic reform process and
(ii) environmental protection.

14.4.3 Race to Bottom

In a race to bottom scenario, relatively high environmental standards in
developed economies impose high costs on polluters. So, polluting activities
in high-income economies face higher regulatory costs than their counterparts
in developing countries. This creates an incentive for at least some highly
polluting industries to relocate and thereby result in international capital
reallocations. Rising capital outflows force governments in high-income
countries to begin relaxing environmental standards. As the race to bottom
accelerates, the EKC flattens and rises toward higher existing level of
pollution.

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 Growth and
14.5 MARKET MECHANISM Environment

The existence of a self-regulatory market mechanism for traded natural

resources is expected to prevent environmental degradation. The argument
underlying this assertion is that in the early stages of growth, there is a heavy
exploitation of natural resources due to the relative importance of the
agricultural sector. This tends to reduce the stock of natural capital of an
economy. Efficient use of natural resources would increase only after: (i) a
threshold stage of development is crossed, (ii) markets for environmental
resources develop and (iii) prices begin to reflect the real value of natural
resources. Consequently, the rising price of natural resources reduces their
exploitation at later stages of growth. Further, higher prices of natural
resources accelerates the shift toward less resource-intensive technologies.
Hence, not only induced policy interventions, market signals also can explain
the shape of the EKC. Therefore, EKC has become a standardised notion in
technical discourses about environmental policy. Strong policies and
institutions in the form of more secured property rights, better enforcement of
contracts and effective environmental regulations can help flatten the EKC.
Most of the empirical evidences suggest that environmental problems can be
solved at higher levels of income only for some specific environmental
quality indicators. The factors which contribute to this are the following.

14.5.1 Information Accessibility

Degree of competition in the market depends on information about the
product quality and production process. Given the overall sources of
pollution, emissions partially account for the environmental problem. Other
than economic growth, several other factors like income distribution,
education, information accessibility, etc. also goes to determine
environmental quality. Since social policy decisions heavily depends on
information accessibility (corresponding to the position of the economy and
the environmental quality), information plays a vital role to curve down the
pollution levels through regulations.

14.5.2 Regulation
With economic growth, economies advance along with the development of
their social institutions essential to enforce environmental regulation.
Developing countries are now moving from command-and-control policies to
market-oriented forms of regulation. Information about polluters, damages,
local environmental quality, abatement measures, etc. significantly improves
the ability of regulators to enforce environmental standards. Environmental
regulatory institutions are either weak or absent in less developed countries.
In this situation, focusing on few sources, which are responsible for most of
the pollution, helps. Targeting, monitoring and enforcement efforts on such
dominant sources can significantly reduce emissions. When formal regulation
is weak or absent, ‘informal regulation’ to induce pollution abatement can
work. For instance, in a situation where community complaints was
confronted by a paper mill in India, the company installed pollution
abatement equipment and also compensated residents for repairing the 241
Sustainable damage caused. Non-Governmental Organisations (NGOs) and social groups
Development
(including religious institutions, social organisations and politicians) can thus
contribute in informal regulation. Such informal pressure has to be highly
localised with a proactive vernacular media acting as an important agent. The
resulting ‘pollution equilibrium’ reflects the relative bargaining power of the
informal efforts of the community and the formal efforts of the government.

14.5.3 Property Rights

Most of the natural resource base could be treated as commons although with
time, some commons gets redefined as private property. Private property is,
however, the most incentive-enriched as individuals have greater incentive to
manage, conserve and accumulate wealth (either to be traded or passed on to
future generations). Economic progress is partly determined by the extent to
which environmental assets are protected by private property rights.
Countries with a high degree of private ownership and proper allocation of
property rights have more efficient resource allocation which help to increase
income and decrease environmental problems. Policies related to secured
property rights under a rule of law with better enforcement and effective
environmental regulations can help flatten the EKC. In other words, EKC
could be a proxy for a property rights model that begins with a commons and
ends with private property rights.

14.5.4 Structural Change

Along with economic development, societies advance with their social, legal,
and fiscal infrastructures which are essential for enforcing environmental
regulation. Institutional changes triggered by citizens’ demand for cleaner
environments are more likely to occur in democratic countries. Such changes
could lead to structural changes both in the patterns of production as well as
the socio-economic features. It is observed that the production structure shifts
rapidly in industrialising and developing countries whereas it remains more
or less stable in developed countries. In a developing economy, the sectoral
composition also changes rapidly, changing thereby the industry’s share in
GDP. Such changing compositions of economic activity, in combination with
trade, could have a major impact on environment. Sometimes, an external
shock may also force the structure of the economy to change.

14.5.5 Socio-Political Regime

Restructuring the environment tends to become more and more expensive,
and it may be less costly to prevent or abort it today than in the future. There
is a general agreement that environmental policies are the key determinants
of the future path of income-environment relationship. Public preferences are
reflected through environmental quality related public policies that influence
the relationship between income and pollution. In other words, demand-side
characteristics are identified to influence the state’s environmental policy,
and also the mechanism through which such preferences are manifested.
Provision of public good, especially with regard to air and water quality, falls
in the state domain because it is beyond the capacity of individuals to
242 influence the quality of such goods directly. The environmental policy is thus
a function of the preferences of society with the actual levels of Growth and
Environment
environmental quality depending on the weights placed on various
heterogeneous societal preferences generally characterised as ‘the policy
regime’. One major determinant of environmental policy is the socio-political
regime of a country in which corruption and rent seeking behaviour greatly
influences the income-environment relationship. A well-defined property
rights structure, democratic voting systems and respect to human rights create
synergies leading to increased levels and efficacy of environmental policy.
Such policies are formulated at national level but implemented at local levels.
In many such situations, command and control policies are ineffective
because policy makers suffer from lack of proper information about local
environmental damage. Local communities should therefore assume a role in
protecting their environment. The demand for environmental protection
should therefore come from local levels to national levels and thereby to
global level. It is such demand led policies which are emerging and will
actually shape the Future World.

Check Your Progress 2 [answer within the space given in about 50-100
words]
1) In what way ‘income elasticity of demand’ contributes to the following
of EKC by a country?
.....................................................................................................................

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2) How does technology aids adoption of cleaner methods of production
thereby reducing the ill-effects on environment?

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3) How does ‘technological progress’ assists developing countries in

controlling their environmental degradation?

.....................................................................................................................

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243
Sustainable 4) Why do certain pollutants have different shaped trajectories than that of
Development
EKC?

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5) What is meant by ‘displacement hypothesis’ in the environmental

literature?

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6) What are the three factors which contribute to altering the structural
composition of industries, linking trade and changing environmental
standards, in a country?

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7) Do you agree that globalisation is compatible with improving
environmental standards? How?
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8) What do you understand by the term ‘race to bottom’? Does this give a
reason for the EKC to have a secondary turning point?

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244
9) How does ‘informal regulation’ help in abatement of pollution? In this Growth and
Environment
context, what does the term ‘pollution equilibrium’ mean?

.....................................................................................................................

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10) In what way does the ‘demand side characteristics’ influence the
environmental policy of governments?

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14.6 LET US SUM UP

Economic growth and Environmental quality have elicited conflicting
reactions from researchers and policy makers with the stakes in growth -
environment debate being high for both the developing and the developed
countries. Among a multiplicity of possible outcomes, an inverted-U pattern
can only be obtained under specific circumstances. This requires attention to
an array of factors that forms the economic-environmental system. The
growth-environment (or EKC-analysis) may have some limitations but
empirical evidence for the existence of the EKC is substantial although not
always conclusive. The subject of EKC analysis is thus open-ended with the
growth-environment debate continuing to be widely discussed. Again this
background, the unit exposes the learners to its various determinants and
instruments.

14.7 KEY WORDS

Steady State Strategy : A zero rate of growth, argued by the Club of
of Development Rome, to cope with the ‘finiteness of
environmental resources’ which would
eventually prevent economic growth.
Development Path : This is an idea which provided a stage-based
link between environment and economic
growth. It argued that once a certain stage of
development is reached, countries would
themselves attach a greater value to
environmental quality.
Factor Endowment : This hypothesis asserted that under free trade,
Hypothesis the differences in endowments (or technology)
would determine trade between two countries. 245
Sustainable
Development 14.8 SOME USEFUL BOOKS AND REFERENCES
1) Dinda S (2004). Environmental Kuznets Curve Hypothesis: A Survey,
Ecological Economics 49, 431-455.

2) Grossman G M, Krueger A B (1995). Economic Growth and the

Environment, Quarterly Journal of Economics, 110 (14), 353– 377.

3) Selden T, Song D (1994). Environmental Quality and Development: is

there a Kuznets Curve for Air Pollution Emissions? Journal of
Environmental Economics and Management 147, 147– 1614.

4) World Bank (1994). World Development Report, Oxford University

Press, New York.

14.9 ANSWERS/HINTS TO CHECK YOUR

PROGRESS EXERCISES
Check Your Progress 1
1) Since the 1990s with the publication of World Development Report,
1992.
2) Structural economic change and transition, technological improvements,
etc.
3) Environmental degradation rises rapidly in the early stage of economic
growth primarily because the society attaches a higher priority to growth
of material output.
4) Growing almost at the same rate.
5) The compromise is provided by a stage-based link between environment
and economic growth.
6) Kuznets’s name was later attached to the inverted-U relationship
between pollution and economic development since Krueger’s study
(1993) observed the same relationship as observed by Kuznets between
inequality of income and growth of GDP.

7) No. The EKC may a short run phenomenon for local air pollutants and
may not hold in the long-run.

Check Your Progress 2

1) By creating pressure for environmental protection regulations and
institutional reforms.

2) By a gradual replacement of energy intensive industrial activity with

knowledge based technology-intensive industrial activity.
3) By enabling the production of a given amount of goods with successively
reduced burdens on natural resources and environment.
246
4) Because, as income grows, structural changes may result in one pollutant Growth and
Environment
to decline but another to rise due to new technologies.

5) Displacement hypothesis suggests that people create/keep distance from

pollution or polluted products.

6) Social, legal and fiscal infrastructures.

7) Yes. Globalisation could be a driving force for global economic growth

notwithstanding the fact that opinion is divided about the benefits of this
process.

8) Due to relatively high environmental standards in developed economies,

polluting industries in high-income economies face higher regulatory
costs providing an incentive for at least some highly polluting industries
to relocate.

9) Through NGOs, social groups, etc. Pollution equilibrium refers to the

result of bargaining power of the informal efforts of the community and
the formal efforts of the government.
10) Environmental policy being a function of the preference of society,
public preferences on environment influences the relationship between
public policies and pollution.

247
Glossary
GLOSSARY
Abiotic Natural : Abiotic resources are non-living objects found
Resources in the biosphere (e.g. minerals, water, air and
energy resources like petrol, diesel, etc.).
Act : An Act is a legally binding legislation or law. It
is enacted by either the parliament or a state
legislative assembly with their jurisdiction
extended either to the whole nation or the
particular state.
Ambient-differentiated : Refers to the compensation for damage
Regulation inflicted.
Arrow’s Impossibility : Arrow’s result shows how aggregate
Theorem preferences will be ‘well-behaved’ (i.e.
complete, transitive and reflexive, and
independent of irrelevant options), only under a
dictatorship. In other words, the desired
properties of a social welfare function cannot
be achieved under a democracy. ‘Aggregation’
of individual preferences to construct social
preferences is, thus, not a straightforward
exercise.
Bill : The draft of a proposed law presented for
debate in either a house of parliament or state
assembly.
Biotic Natural : Biotic natural resources are either gathered
Resources from the biosphere or may be grown by
mankind (e.g. vegetables, birds, trees, plants,
algae, worms, etc.).
Cap and Trade : The regulator sets a cap (a limit) on overall
emissions and allows trading among polluters.
This system is more centralised. Trading
involves a price or value on a permit to pollute.
Cap-and-Trade System : A policy through which a limited number of
permits to pollute are issued and can be bought
and sold in the market. It combines a quantity
based limit on emissions and a price based
approach that places a cost on environmentally
damaging decisions.
Capital Flight : Describes a phenomenon of outflows of
resident capital due to distortion in domestic
policies and political risk or instability.
Coasian Bargaining : Refers to a negotiation process that takes place
privately between parties to eliminate an
externality provided property rights are
defined.
248
 Glossary
Command and Control : CAC prescribes regulations on what to do and
(CAC) Approach in what measure? They involve the
environmental regulator stipulating the action
that an individual firm or polluting agent
should take with regard to pollution control for
environmental protections. A polluter may
have limited flexibility in how it meets the
regulatory requirements.
Congestible Goods : Goods that are excludable but non-rival up to a
point.
Contingent Valuation : In contingent valuation method, the individual
Method is posed a set of questions directly asking him
to reveal his willingness to pay for the good.
Cost-Effectiveness : The cost-effectiveness of a policy is defined as
achieving the target/goal by implementing a
said policy at least cost.
CPCB : A statutory organisation, constituted under the
Water (Prevention and Control of Pollution)
Act, 1974. It is entrusted with the powers and
functions to prevent and control air and water
pollution.
Development Path : This is an idea which provided a stage-based
link between environment and economic
growth. It argued that once a certain stage of
development is reached, countries would
themselves attach a greater value to
environmental quality.
Discrete : A firm can produce one good/product for
Manufacturing distinct purposes with differentiated
Production Technology technologies for a given time. For instance,
M&M company produces Jeeps with discrete
technology for civilian and defence.
Ecological Footprint : This is a measure of human impact on earth’s
ecosystem. It reveals the dependence of the
human economy on natural capital.
Ecosystem : Ecosystem refers to coexistence and mutual
interaction of living organisms and nonliving
components in the natural environment as a
system.
Efficiency : An allocation of resources is efficient if it is not
possible to make anyone better off, without
hurting at least one person in the economy.
Efficient Emissions : When the cost of abating one more unit of
pollution by one polluter is equal to the cost of
abating one more unit of pollution by another is
equal across ‘n’ number of polluters, then an
249
Glossary efficient aggregate level of emission is
achieved.
Emission Rate Trading : ‘Emission trading’ is expressed in terms of the
rate that a pollutant constitutes in total output.
Emission- : This ignores the differences among polluters
Differentiated and tries to control pollution in such a way as
Regulation to achieve the ambient target.
Environmental : An Act passed in 1986 with the objective of
Protection Act, 1986 providing for the protection and improvement
of the environment. It empowers the central
government to establish authorities charged
with the mandate of preventing environmental
pollution in all its forms and to tackle specific
environmental problems that are peculiar to a
region.
Equity : It is a normative concept, often understood as
‘fairness’.
Existence Value : Value which arises from mere knowledge that
the environmental resource exists.
Externalities : Externalities arise when the consumption or
production of one agent affects (positively or
negatively) the consumption and/or production
of another agent with no compensation
mechanism existing.
Factor Endowment : This hypothesis asserted that under free trade,
Hypothesis the differences in endowments (or technology)
would determine trade between two countries.
Global Common : The term describes international or
global resource domains in which common-
property resources are found. They include the
earth’s shared natural resources, such as the
high oceans, the atmosphere and outer space
and the Antarctic in particular.
Hedonic Pricing : Under the hedonic pricing method, keeping
Method other things constant, we measure the price of
housing for different levels of air pollution and
see how the housing price changes due to
change in air pollution.
Index of Sustainable : Developed by Daly and Cobb (1989), this is an
Economic Welfare indicator intended to replace the GDP. It tries
(ISEW) to include variables related to social and
environmental issues over and above the ones
included in the conventional income
accounting.
Kaldor-Hicks : This criterion postulates that a change is
Compensation Test welfare-improving as long as the winners
250
 (those who gain from the change) could, in Glossary

principle, fully compensate the losers, and still

be better off.
Liability : It means if you harm someone, you must
compensate that person for damage.
Liability laws : Liability laws make polluters liable for the
damages they cause. The party claiming
damage can approach the court which can
assess the value of the damages and stipulate
suitable compensation in accordance with the
law.
Market Based : Indirect instruments which provide rewards for
Instruments polluters to do what is perceived to be in public
interest.
Market Failure : Refers to the inability of the market to achieve
allocative efficiency, due to the violation of
certain ‘ideal’ conditions.
Marketable : Marketable environmental assets are those
Environmental Assets natural assets which can be traded in the
market (e.g. timber, medicinal plants, minerals
and natural gases, etc.).
MoEF : The nodal ministry ‘for planning, promotion,
co-ordination and supervising the
implementation’ of India’s environmental and
forestry policies and programmes.
Natural Assets : Natural assets are provided to us by the nature.
These include air, soil, water, forests,
biodiversity, minerals, etc.
Net Primary : This ratio measures the human society’s draw
Production- on nature. It indicates the rate of human
Consumption Ratio appropriation/consumption of the net primary
resources from various natural eco-systems like
forests, oceans, land, etc.
Non-Excludability : Refers to a situation where no agent is denied
access to a good or service.
Non-Marketable : Non-marketable environmental assets are non
Environmental Assets tradable natural assets. They cannot be sold and
bought in the market because they are common
property resources (e.g. river, wildlife, air,
groundwater and glaciers, etc.).
Non-Produced Assets : Non produced assets are supplied to us by
nature free of cost. They include all natural
assets.
Non-Rivalry in : Refers to a situation where the consumption by
Consumption one agent does not reduce the units of
consumption available to another agent. 251
Glossary
Non-Use Value : Value which arise even when the good is not
actually used (e.g. existence value).
Normative Economics : The branch of economics that can be used to
explain ‘what should be’. It entails making
value judgements.
Offset Trading : Offset trading targets the new firms to pay
existing firms to reduce their emission below
standard so as to offset the added emissions of
the new firms.
Open-Access Resources : Goods that are non-excludable but rival.
Optimality : At an optimal allocation, society’s welfare is
maximised.
Pareto Improvement : It is defined as a change where at least one
person benefits, and nobody loses.
Pigouvian Fee : It is an emission fee exactly equal to the
aggregate marginal damage by emissions when
evaluated at the efficient level of pollution.
Point and Non Point : Pollutants enter the water environment from
Sources of Pollution two main types of sources: point source and
non point sources. A point source is a single,
identifiable source of pollution, such as a pipe
or a drain. Industrial wastes are commonly
discharged to rivers and the sea in this way.
Non-point sources of pollution (also termed
‘diffuse’ pollution refer to such impacts which
occur over a wide area and are not easily
attributed to a single source. For instance, in
farming areas non-point sources of pollution
include pesticides, fertilizers, animal manure
and soil washed into streams in rainfall run-off.
Policy : A purposive course of action followed by an
actor (or set of actors)to deal with a problem or
matter of concern.
Pollution Fees : The payment paid by the polluter to a
regulatory body per unit of pollution emitted.
Pollution Halo : FDI brings new and cleaner technology that
reduces pollution level in developing countries.
Such FDI diffuses advanced technologies,
upgrades managerial skills and practices
creating pollution halos in developing
economies.
Pollution Haven Effect : This is a weaker version of PHH which
predicts the movement of FDI in response to
environmental regulation and net pollution of
developed country declines.
252
 Glossary
Pollution Haven : Predicts that removal of trade barriers between
Hypothesis (PHH) developed (high income) and less developed
(low income) countries results in pollution
intensive production moving to low income
countries with relatively low environmental
regulation.
Porter Hypothesis : Asserts that stricter environmental standards
spur innovations that enhance the character of
competitiveness, and hence, right kinds of
environmental policies will help the economies
in the long run.
Positive Economics : The use of economics to describe the world. It
is a value-neutral analysis.
Private Goods : Goods that are both rival and excludable.
Produced Assets : Produced assets are those which are generated
by mankind by using natural and other
resources and technology.
Public Goods : Goods that are non-rival and non-excludable.
Such goods are typically not provided at the
efficient level by private markets.
Revealed Preference : Under this method, preferences for
Method environmental goods and services are inferred
from observed behaviour in actual markets. For
this purpose, markets closely related to the
environmental goods are chosen.
Stated Preference : Under this method, individuals are directly
Method asked to state their willingness to pay for the
particular environmental good (e.g. contingent
valuation method).
Steady State Strategy : A zero rate of growth, argued by the Club of
of Development Rome, to cope with the ‘finiteness of
environmental resources’ which would
eventually prevent economic growth.
Stock Pollutant : Pollutants towards which the environment has
low absorptive capacity are called stock
pollutants (e.g. persistent organic pollutants
such as PCBs, non-biodegradable plastics, and
heavy metals). Stock pollutants accumulate in
the environment over time. The damage they
cause increases as more pollutant is emitted
and persists as the pollutant accumulates. Stock
pollutants can create a burden for future
generations, by passing on the damage that
persists well after the ‘benefits’ received from
incurring that damage are forgotten.
Strong Sustainability : The concept argues for the conservation of
253
Glossary natural resources and environmental quality, at
least in its minimum amounts. The concept
assumes that environmental processes are
irreversible and hence manufactured and
human capital are not substitutes of natural
capital.
Subsidies : Subsidies refer to what the public authority
pays a polluter for every ton of emission
reduced from a bench mark level.
Sustainable : Economic progress that meets the needs of the
Development current generation without compromising the
needs of the future generations.
Tradable Permit : Allows polluter to buy and sell the right to
pollute. Pollution control is expressed by
holding the number of emission permits.
Tragedy of Commons : This is a term used in social science to describe
a situation in a shared-resource system where
individual users acting independently as per
their own self-interest behave contrary to the
common good of all users by depleting or
spoiling that resource through their collective
action. The concept became widely known
owing to an article written by the American
ecologist and philosopher Garrett Hardin in
1968. In the modern economic context,
commons is taken to mean any shared and
unregulated resource such as atmosphere,
oceans, rivers, fish stocks, or even an office
refrigerator.
It is argued that the very term ‘tragedy of
Commons’ is a misnomer since ‘the commons’
refers to land resources with rights jointly
owned by members of a community with no
individual outside the community having any
access to the resource. However, the term is
now used in social sciences and economics for
describing a problem where all individuals
have equal and open access to a resource. Thus,
‘tragedy of open access regimes’ or simply ‘the
open access problem’ are more apt terms.
Upcycling and : Upcycling can take place in perpetuity (i.e.
Recycling forever) while recycling mainly delays the final
disposal of waste material.
Use Value : Value that comes from the actual usage of the
environmental good.

254
 Glossary
Waste Sink : The service provided by the environment
wherein it acts as a receptacle of residuals
generated by human activity.
Weak Sustainability : Refers to the maintenance of total capital stock
in a non-declining manner. It assumes that
manufactured and human capital are perfect
substitutes of natural capital consumed in
production process and that they can be
aggregated in the same units.
Welfare Economics : The branch of economic theory which
investigates the nature of the policy
recommendations that the economist is entitled
to make.

255
Glossary
SUGGESTED READINGS

1) Acharya Rajat (2013). Trade and Environment, OUP.

2) Barry C Field & Martha K Filed (2017). Environmental Economics: An

Introduction, McGraw Hills, USA.

3) Copeland B R and Taylor M S (2004). Trade and Environment: Theory

and Evidence, Princeton University Press.

4) Hanley N, Shogren J F and White B (2001). Introduction to

Environmental Economics, Oxford University Press.
5) Kolstad C (2006). Environmental Economics, Oxford University Press,
New Delhi.
6) Leelakrishnan P (2016). Environmental Law in India, 4th Edition,
Lexisnexis.
7) Perman R, MacGilvray J and Common M (2003). Natural Resource and
Environmental Economics, Harlow, England: Addison-Wesley.

8) Tom Tietenberg (2003). Environmental and Natural Resource

Economics, 6th Edition, Pearson Education.

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