Thursday, January 14, 2010

On the Environmental Kuznets Curve

The Environmental Kuznets Curve (EKC), as first hypothesized by Gene Grossman and Anne Krueger (here and here) in the first half of the 1990s, posits a situation in which economic growth, initially driven by heavy industrial production, causes substantial and increasing environmental damage, but as per capita income increases, economic production switches (at least in consumer-driven economies) to production of less environmentally stressful consumer goods and services, so that the level of environmental stress per unit of production begins to decline. Meanwhile, technological developments allow for higher levels of production using fewer resource inputs, thereby further reducing the level of environmental stress per unit of production. Finally, wealthier consumers demand increasing levels of environmental quality, which leads (at least in countries where leaders are responsive to popular demands) to reduced levels of pollution. Thus, the EKC describes an inverse U-shaped curve, with pollution (or environmental stress more generally) rising as per capita income rises, but then leveling off and falling at higher levels of per capita income. It is named for the economist Simon Kuznets, who earlier described a similar inverted U-shaped curve to describe relations between per capita income levels and levels of inequality in a society.

The EKC looks like this:

Richard T. Carson has an interesting article in the new issue of the Review of Environmental Economics and Policy (Vol. 4, No. 1, winter 2010, pp. 3-23) assessing the literature on the EKC. He confirms Grossman and Krueger's early warning that the process linking economic performance and environmental performance is "not an automatic one." A country cannot simply expect to grow its way out of environmental problems.

Indeed, that's what I concluded in my 1998 book, Instituting Environmental Protection, in attempting to understand why the EKC did not function in socialist economies, despite relatively high levels of growth in per capita income.Structural features of the socialist economic system, including the lack of scarcity pricing and very soft budget constraints impeded improvements to factor productivity that would have allowed for higher levels of production at less environmental cost. In addition, the political system was hardly responsive to growing popular demand for more environmental protection.

To make a long story short, the relation between per capita income and pollution levels depends largely on institutional features that significantly complicate the model. Carson rightly urges that researchers pay more attention to those institutional features. Finally, Carson notes (pace Susmita Dasgupta and co-authers, here) that developing countries do not necessarily have to suffer high rates of environmental degradation in early stages of economic growth as the EKC suggests.

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