Econ 372 Environmental Kuznets Curve

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• • The Environmental Kuznets Curve (EKC) is an adaptation of Simon Kuznets's observation about how income inequality initially tends to grow as income per capita rises from a very low level, but then income inequality the falls at higher income levels.  The EKC again follow growth in per capita income from very low to higher levels, but instead of graphing this against income inequality, the new variable is pollution.  For many pollutants, this is found to rise as incomes rise from low levels, but then reverses and falls as incomes reach higher levels (for many pollutants this income threshold is around $8,000 per capita).

  • Building on the work of Gene Grossman and Alan Krueger ("Economic Growth and the Environment," Quarterly Journal of Economics, 110, no. 2, (1995), pp. 353-377) , the usual way of estimating an EKC relationship is to run a panel over countries across time.  The econometrics are nicely described on page 6 of this 2003 paper by David I. Stern.

  • When the EKC relation holds, what might be the reason?  Here are some possible explanations:

    • Rich citizens demand cleaner local environments.

    • Countries tend to follow a development path from relatively clean agrarian, to dirty industrial, to clean service economies.  

    • Rich countries outsource their polluting industries to less developed countries.

    • As countries develop, so to do their political institutions, which allows collective action to solve the pollution problem.

    • Richer countries have better and thus cheaper technology for abating pollution.

    • Rich countries have more degraded environments that can't handle much more pollution, so cut emissions.

    • Poor countries are relatively clean, so pollution matters little and thus they use the cheapest and dirtiest production technologies.

  • This sort of process was likely behind Larry Summers's thinking in his infamous World Bank memo (actually written by Lant Pritchett).  More background.

"The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity. The concern over an agent that causes a one in a million change in the odds of prostate cancer is obviously going to be much higher in a country where people survive to get prostate cancer than in a country where under 5 mortality is 200 per thousand."

• • Should domestic producers in countries that impose Pigouvian taxes or Cap & Trade have to compete with foreign firms where there are no such attempts to impose costs for negative externalities produced?   Or should "clean" domestic producers be protected from "dirty" foreign competitors through environmental tariffs?

    • READ:  Paul Krugman on carbon tariffs

      • It's legal (July 1, 2009)

      • The WTO is fine with it (June 26, 2009)

      • And it makes economic sense (June 29, 2009)