Environmental Kuznets Curve - Essay Example

?The EKC Hypothesis There has been widespread debate over the linkage between environmental quality and the effects of economic growth. At one end ofthe continuum are economists who claim that scarce environmental resources always limit the benefits of economic growth; hence, zero economic growth or a steady state economy is ideal (Meadows et al., 1972). On the other end of the continuum, economists advocate that progress in technology along with sustainability of natural resources would lead to little reliance on natural environmental resources; thus, economic growth ought to be there (Beckerman, 1992). As noted by (Shafik, 1994), empirical evidence was lacking to support either of the above two arguments. Furthermore, much difficulty was faced in operationally defining the dimensions of environmental quality. Although no single parameter can be used to define environmental quality, a combination of parameters has been developed for environmental deprivation in order to demonstrate the effect of economic growth on the quality of environment. Amongst one of the first studies conducted in this regard were those of the World Development Report. As shown in Appendix 1, some dimensions of environmental deprivation (including emissions of carbon dioxide and solid waste pollution) are highly correlated with income, meaning that they increase as income increases; in other words, in terms of these dimensions, economic growth has a negative effect on environment. Others (including lack of safe drinking water and sanitation facilities) tend to decrease as income increases, implying that economic growth can be used as an instrument for enhancing quality of environment. Still others (emissions of sulfur dioxide and nitrous oxide) show an inverted U linkage with economic growth, implying that environmental deprivation becomes worse in the initial stages of growth and improves in the later stages. This hypothesis of the inverted U relationship between variables of environmental degradation and economic growth is the central premise of the Environmental Kuznets Curve as formed by Simon Kuznets (Appendix 2). Theoretical Background on the EKC As noted by Grossman, 1995, the effect of growth in income on environmental degradation can be broken down into three main streams. Firstly, growth is demonstrated to have what is called a “scale impact” on environment; that is, the larger the size of economic activity the larger the rate of environmental degradation (Grossman, 1995). This is due to the fact that an increase in income is the product of increasing factor inputs and natural resources of which waste and environmental degradation is a by-product (Grossman, 1995). Secondly, the positive effect on environment of economic growth is what is known as the “composition effect”; that is, as income increases, structural economic changes tend to increase the proportion of environmentally friendly practices in the economy (Grossman, 1995). Thus, as per the combination of these two effects, environmental quality tends to go down due to structural economic changes in the economy that is in transition from rural to urban and from agricultural to a largely industrial structure but starts to improve as the economy undergoes a second structural change from heavy industrial processes to technology-intensive ones (Panayotou, 1993). Finally, the technological advancement that accompanies economic growth and the resulting increased expenditure on research and development leads to the adoption of cleaner, environmentally friendly technology which enhances the environmental quality. This is termed as the “technique effect” (Grossman, 1995). As the Environmental Kuznets Curve suggests, the inverted U relationship between quality of environment and economic growth implies that the harmful impact on environment ( as per the scale effect) is explicit during the early phases of growth but is ultimately offset by the positive effects of the other two effects ( composition and technique) in the later stages. It is here that the elasticity of environmental demand with respect to income comes into place. As economic growth takes place, people’s incomes grow and the resulting structural changes in the mindset and attitudes of people invoke them to become environmentally conscious which leads to ‘greener’ measures in the society, thereby reducing the rate of environmental degradation. The other aspect is that increased incomes and environmental awareness can induce governments to impose tighter environmental controls thereby enhancing environmental quality. Another theoretical framework to explain this is the “self-regulatory market mechanism” associated with the exchange of natural resources within an economy (Unruh & Moomaw, 1998). The stock of natural resources tends to decrease during the early growth stages which results in increased prices. This price signaling mechanism then induces lower exploitation of natural resources at subsequent stages in economic growth (due to high prices) (Unruh & Moomaw, 1998) (World Bank, 1992). Due to this reason, economies also tend to shift towards technologies that are less resource intensive. Thus, the shape of the EKC is not only explained by enhanced environmental government expenditure but also the price signaling mechanism of the free markets (Torras & Boyce, 1998). Findings of Empirical Analysis Based on the above theoretical analysis, the question now arises as to whether or not the EKC holds true for empirical data and, if so, what is the turning point( of income level) at which the environmental quality starts improving . For this purpose, researchers have used cross-country data due to lack of long term time-series data. Cross-country analysis Three fundamental classes of environmental indicators have been used: air pollution, water pollution and other indicators of environmental degradation. As far as air quality indicators are concerned, the EKC relationship is strong. Researchers have fragmented air pollution indicators into local and global pollutants (Barbier, 1997). The former (including carbon monoxide, nitrous oxide and sulfur dioxide) demonstrate the inverted-U association with income levels (Cole et al., 1997). However, the turning points for carbon monoxide, nitrous oxide are higher than that of sulfur dioxide (Appendix 3). Differences also exist amongst researchers regarding the same indicator (Appendix 3). The relationship of income with global pollutants (such as carbon dioxide) is negligible. Some studies also indicate a large bias showing that the relationship is very unreliable. As far as water pollution indicators are concerned (including pathogens, heavy metals, water oxygen), the turning point is higher than that for air quality indicators. A few indicators also demonstrate an N-shaped curve; that is, water quality tends to deteriorate first, then improves and finally worsens again (Appendix 4). This implies that at elevated levels of income, the level of economic activity becomes so large (scale effect) that the worsening of environmental degradation fails to be offset by the composition and technique effects (Shafik, 1994). Finally, ‘other indicators’ tend to demonstrate little of no evidence of the EKC relationship. In line with research findings, when environmental issues that are capable of being externalized ( such as solid waste), the EKC does not hold true; that is, the curve doesn’t slope downwards at high levels of income as opposed to the case when environmental issues are internalized. For deforestation, some researchers conclude that the EKC holds true (Panayotou, 1993) whereas others claim just the opposite (Shafik, 1994). Single country analysis Roberts and Grimes (1997) tend to challenge the validity of the EKC relationship for indicators that have shown this to be true. According to them, in 1990, the previously linear relationship between income and carbon intensity shifted to an inverted-U relationship. This is because the results are based on the experiences of developed nations and not intra-country data regarding transition from various stages of economic development (Roberts & Grimes, 1997). Drawing from the inability of cross-country analysis to produce valid conclusions regarding the existence of EKC, Vincent (1997) studied the relationship, from 1970 to 1990, between GDP per capita and indicators of water and air quality in Malaysia. His findings revealed that the EKC does not hold true for Malaysia (Vincent, 1997). Similarly, de Bruyn et al. (1998) traced a positive relationship between air pollution and income growth in 4 OECD nations (Netherlands, West Germany, UK and USA) over the period 1960-1993, based on empirical findings (de Bruyn et al., 1998). However, other research contradicts this conclusion by claiming that the per capita emissions of air pollutants fall as income rises (Carson et al., 1997). The central premise of all these single country researches is that the EKC is not valid for longitudinal data. Recommendations One school of thought argues that the present rate of environmental degradation has a tendency to enlarge in the long run, hence, government policy should aim at more rapid economic growth in order to climb up the hump or the turning point soonest possible. However this maybe a tedious process, taking several years before the curve slopes downward; the longer the wait the higher the abatement costs. If the emissions augment beyond the threshold level, nations enter what is known as the ‘shadow’ area where environmental degradation becomes irreparable. (Appendix 5).Hence, the policy of waiting for the relationship to become negative can be potentially damaging. A more appropriate policy is to “tunnel through” the curve and to flatten it through government interventions such as subsidies on energy and agrochemicals and property rights on natural resources. It is also important to note that developing nations cannot follow what their developed nations did in early stages of development (Unruh & Moomaw, 1998). Infact, the amount of greenhouse emissions inherited by today’s less developed nations is much higher than that inherited by their developed counterparts in similar stage of development. Infact, several resource-intensive industries have shifted from the North to South, thus putting the latter at a disadvantaged position. In the absence of an international government, international environmental policies under the umbrella of ‘sustainability’ are required to enforce both wings (the developed and developing) to cut down environmentally harmful emissions. References: Barbier, E., 1997. Introduction to the environmental Kuznets curve special issue. Environment and Development Economics, 2, pp.369-81. Beckerman, W., 1992. Economic growth and the environment: whose growth? Whose environment. World Development, 20(4), pp.481-96. Borghesi, 1999. Cross-country data. Available at: [Accessed 18 May 2011] Borghesi, 1999. N-shaped (cubic) curve. Available at: [Accessed 18 May 2011] Borghesi, S., 1999. The Environmental Kuznets Curve: a Survey of the Literature. PhD Thesis. European University Institute. Carson, R.T., Jeon, Y. & McCubbin, D.R., 1997. The relationship between air pollution emissions and income: US data. Environment and Development Economics, 2, pp.433-50. Cole, M.A., Rayner, A.J. & Bates, J.M.., 1997. The environmental Kuznets curve: an empirical analysis. Environment and Development Economics, 2, pp.401-16. Christoph Lieb, 2004. Environmental Kuznets Curve. Available at: [Accessed 17 May 2011]. de Bruyn, S.M., van den Bergh, J. & Opschoor, J.B., 1998. Economic growth and emissions: reconsidering the empirical basis of environmental Kuznets curve. Ecological Economics , 25, pp.161-75. Grossman, G.M., 1995. Pollution and growth: what do we know? In I., G. & L.A., W., eds. The economics of sustainable development. Cambridge, 1995. Cambridge University Press. Meadows, D.H., Meadows, D.L., J., R. & Behrens, W., 1972. The limits to growth. New York: Universe Books. Munasinghe 1998, "Tunneling through" the EKC. Available at: [Accessed 18 May 2011] Panayotou, T., 1993. Empirical tests and policy analysis of environmental degradation at different stages of economic development. Working Paper 238. Geneva: International Labor Office. Roberts, J.T. & Grimes, P.E., 1997. Carbon intensity and economic development 1962-91: a brief exploration of the environmental Kuznets curve. World Development, 25(2), pp.191-98. Shafik, N., 1994. Economic development and environmental quality: an econometric analysis. Oxford Economic Papers, 46, pp.757-73. Torras, M. & Boyce, J.K., 1998. Income, inequality, and pollution: a reassessment of the environmental Kuznets curve. Ecological Economics, 25, pp.147-60. Unruh, G.C. & Moomaw, W.R., 1998. An alternative analysis of apparent EKC-type transitions. Ecological Economics, 25, pp.221-29. Unruh, G.C. & Moomaw, W.R., 1998. An alternative analysis of apparent EKC-type transitions. Ecological Economics, 25, pp.221-229. Vincent, J.R., 1997. Testing for environmental Kuznets curves within a developing country. Environment and Development Economics, 2, pp.417-31. World Bank, 1992. World Development Report 1992. New York: Oxford University Press World Bank. World Bank, 1992. 1995 CO2 Intensity. Available at: [Accessed 17 May 2011]. Appendix 1 1995 CO2 Intensity Source: World Bank, 1992. 1995 CO2 Intensity Appendix 2 Environmental Kuznets Curve Source: Christoph Lieb, 2004. Environmental Kuznets Curve Appendix 3 Cross-Country Data Source: Borghesi, 1999. Cross-country data Appendix 4 Source: Borghesi, 1999. N-shaped (cubic) curve Appendix 5 Source: Munasinghe, 1998. "Tunneling through" the EKC Read More