In Search of Sustainability: Trade, Growth and the Environment: M. Scott Taylor Canada Research Chair, Department of Economics of the University of Calgary & Research Associate at the National Bureau of Economic Research, Cambridge MA.

Pollution is a necessary consequence of growth Ongoing economic growth requires new ideas and new technologies. By definition, something that is innovative is new and unknown before – both its positive market possibility is unknown, but so too is its potential for negative impacts. Progress always comes with costs and unintended consequences.

Every Technological Revolution has brought its costs. Internal combustion engine brought us nitrogen oxides, carbon monoxide, and volatile organic compounds. Electricity generation from coal brought us problems with acid rain and now a problem with carbon emissions. Advances in chemistry brought us a host of new products but also CFCs and dioxins. Advances in physics brought us nuclear power, but also severe waste storage problems. Genetic modification will bring us its own pollutant in the future.

Sustainable Economic Growth: A Typical Definition A path of growth for the economy that raises incomes per capita while not harming, and indeed perhaps improving, the environment over time. Long Run Shocks

Need to distinguish 3 things The long run path of economic growth and improvement in environmental quality: SEG The transition path of an economy towards its SEG path. Short run deviations in growth and environmental quality arising from unexpected events.

How will we know we have arrived? When Kyoto is signed, ratified and enforced by every major emitter? When the world’s fish stocks recover and we set aside large areas of ecologically rich areas to conserve biodiversity? When the transition from fossil fuels to biomass or solar polar is well under way?

We will have arrived when All deviations from SEG can be clearly identified as either: A) Short run shocks to growth or the environment that will, or have called forth, new policies and procedures for fixing them. B) Deviations from the SEG are purely temporary and shrink over time as the economy makes its transition.

Emission growth tied to a country’s long run growth rate which is driven by population growth, P, and technological progress, T, Emission growth tied to above average growth rates during a country’s development, D > 0 sometimes, but zero in the Long run. Reductions in Emission growth caused by policy, price or technology induced reductions in emissions intensity per unit of GDP. Call this I. The Long and Short of Emissions growth

Emission Growth Rate Emissions Growth rate = D + P + T - I Scale Effect D Transitional Growth P+T Long Run Growth Technique Effect

Some Accounting Emissions Growth equals D + P+T – I Emissions Growth per Capita equals D+T-I National Income Growth equals D + P + T National Income per capita growth by D+T Transition Period D > 0; Long Run D = 0.

Using our Definition Sustainable Economic growth requires P+T < I Scale effect dominated by the Technique effect. T > 0 for per capita Incomes to rise.

Could we be on a SEG path today? 1. Developed economies are still emitting tons of sulfur dioxide, nitrogen oxides and other pollutants into the world today. 2. The material and resource use per unit of GDP is so high that if India and China were to obtain our levels of development we would need 3 or 4 worlds worth of resources. 3. What about carbon emissions that continue to rise?

Three Simple tests for Sustainability in a Growing Economy 1. Are Emissions falling? Yes, you are in SEG; No, you may still be in SEG. 2. Are emissions per unit of GDP falling? Yes, then I is positive and SEG may be possible; No, then SEG is not possible.

3.Are emissions per capita falling? Yes, its falling. Then SEG is guaranteed if population growth is zero in the long run;. No, its rising. SEG may still be possible if the growth rate of emissions per capita is falling and at least one country in the world has a negative per capita growth rate.

An Example: Consider Key Air Pollutants Sulfur dioxide Nitrogen oxides Carbon Monoxide Volatile Organic compounds Particulate matter

Test 1. All emission levels were rising for most of the 20 th century. During all of this time, they would have failed the first test.

Test 2 Are Emissions per unit of GDP declining? Yes they are.

Declining Emissions to GDP ratios

Test 3 Are per capita emissions falling? For much of the period, per capita emissions are rising. BUT the rate of growth of per capita emissions however fell over time.

U.S. Sulfur Dioxide Emissions

U.S. Carbon Monoxide Emissions

U.S. Nitrogen Oxide Emissions

U.S. Volatile Organic Compounds

U.S. Particulate Matter PM10

How? Emissions per unit of output fell continuously throughout the period; this implies I > 0. Positive Per-capita emissions growth meant that D+T > I Aggregate emissions eventually fell, implying that P+T < I as the U.S. economy slowed down and approached its balanced growth path in the 1970s.

Were the costs huge?

Is this a U.S. specific Phenomena?

International Evidence CountriesNOxPeakSOxPeakCOPeakVOCPeakθ Share Austria-2.8< < < Finland < < Czech Rep.-7.6< France-3.8< < < Germany-5.4< < < Italy < Ireland < Poland < Slovak Rep < Sweden < Switzerland < < Switzerland < < Hungary-3.0< < < Portugal U.K.-4.5< < < Average-4.0n.a.-9.7n.a.-5.4n.a.-4.5n.a.1.3

The Optimistic Case Technological Progress drives long run growth, creates new pollution problems but also lowers abatement costs. Evidence, although sketchy, does indicate large role for technological progress in abatement. New environmental problems will be dealt with in turn and successfully.

Yes, but there are 3 Caveats. 1.Maybe this success is an illusion created by Trading away our problems. 2.What about carbon emissions? Success at the local level does not imply success at the global level. 3.Maybe we were just lucky in the past, will our luck run out with some new pollution problem?

Caveat One: Globalization Are these environmental gains coming from losses in Developing countries that now produce the dirtiest of our commodities? Perhaps the developed world is getting cleaner by shifting dirty good production to the developing world? What looks like success is shifting the burden.

Why is Globalization a suspect? Poor environmental outcomes in many developing countries Weak if any Environmental Regulations. Trend towards specialization in environmentally sensitive or dirty goods Worldwide movement towards liberalized trade

Why is Globalization a suspect? Worldwide movement towards liberalized trade Weak if any Environmental Regulations. Trend towards specialization in environmentally sensitive or dirty goods Poor environmental outcomes in many developing countries

The Pollution Haven Hypothesis Differences in the costs of meeting environmental regulations are the most important motivation for trade in dirty goods. Income levels are key determinants of environmental standards. World income distribution is highly skewed.

Mechanism differences in income differences in environmental regulation differences in production costs trade pattern 5.1

Trade’s Impact Dirty industries move and create pollution havens in poor countries. Pollution in Poor countries rises Rich countries avoid dirty production by importing dirty goods Pollution in Rich countries falls, as their real incomes rise.

Perhaps, but other things matter too A skilled workforce Availability and reliability of electricity Enforcement of contracts Access to natural resources Infrastructure Technological sophistication The cost of capital, etc.

The Empirical Evidence Do pollution regulations affect trade flows? Yes Are these costs so large as to make poor countries into pollution havens for dirty industries? No

Could regulatory costs matter most? Pollution Abatement costs have been rising, but as a fraction of US Real Output they are virtually constant. Costs as a fraction of Manufacturing Value- added are small. Pollution abatement costs are a small fraction of output for all OECD countries suggesting that other determinants of location could be important.

Pollution Abatement Costs/GDP Australia 0.8Korea1.6 Austria2.2Netherlands1.9 Belgium1.4Norway1.2 Canada1.2Poland1.6 Czech Republic2.0Portugal0.8 Finland1.1Slovak Republic1.5 France1.4Sweden1.0 Germany1.6Switzerland1.6 Hungary0.6Turkey1.1 Ireland0.6United Kingdom0.7 Italy0.8United States1.5 Japan1.3

J. Ederington & A. Levinson Trade Liberalization and Pollution Havens, NBER 10585

Conclusions Pollution Haven Hypothesis is logically tight, but may be empirically irrelevant. Pollution regulations matter to trade flows, but not enough to make LDC’s pollution havens for the developed world. Evidence for environmental improvement in the U.S. and Europe is real progress.

Caveat Two: What about the global pollutant Carbon? Harder to be optimistic here. Recognition of the problem is the start of progress.

Recognition Response Treaty

Recognition Response Treaty

Recognition Response Treaty

Are Carbon Emissions falling? No Is Carbon per dollar of GDP falling? Yes Is Carbon per capita falling? Not for most countries, but for some yes? Is carbon per capita converging across nations? Perhaps. What about our simple Tests?

Carbon Growth Rate & Levels

The OECD Countries

Some Good news about our Carbon future? Convergence in emissions per capita across countries is ongoing even absent active regulation. BUT with real economic growth of 3% per year, historic emission intensity reductions of 1.5 – 2%/year have to at least double in the long run. Rates of reduction far in excess of 3%/yr have been achieved by other countries, for other pollutants, and for only small costs. Sustainability in carbon is not only possible, it is probably quite cheap.

Caveat Three: Maybe we have been just lucky. Success is not guaranteed Many earlier societies wrestled with their environmental problems and lost At the time, they were the most advanced, cultured and civilized groups Are we really any different?

Caveats All Solutions require property rights over air, water, soil, etc. Some environmental problems are global, with uncertain and potentially large costs The evolution of property rights regimes is not well understood How civilized are we?

The Easter Island Story Small group of Polynesians arrived in 400 A.D. Built a rich and complex society based on fishing and agriculture Society was so rich that by 600 A.D. large monuments and altars started to be built. Golden age of Easter Island 10,000 islanders, hundreds of altars, and over 800 large statues 1722 Jacob Rogeveen arrives and finds 2000 people living a hard and difficult life Island has no trees or large vegetation; communication with Islanders not possible.

What happened on Easter? Humans ability to take from the environment grew faster than the environment’s ability to regenerate. Overshoot in population numbers and resource collapse, leading to starvation, warfare and death. Easter’s unique environment made it unique in Polynesia.

Are we likely to suffer a similar fate? Written records A belief in the scientific method A more refined system of property rights.

Conclusions Sustainability is a path and not a destination Technological progress in abatement is critical to our success, but technology is both friend and foe. Obtaining SEG with regard to Carbon is more a Political than an Economic problem.

But what about Resource Use? Mature economies have a great throughput of natural resources into them and waste products out. China and India are growing at rates of 9 and 10% year, isn’t this unsustainable?

Decoupling and Dematerialization Much harder to get data here as we typically do not measure resource input or output. One study by the World Resources Institute is called the “Weight of Nations”. Measures the physical weight of materials used in a domestic economy that flow to the environment , data for Japan, Austria, Germany, Netherlands, and the U.S.

Conclusions Total domestic output from these developed economies is virtually stable, but much progress came from one time events. Conservation Reserve in the U.S; elimination of lignite mining in Austria & Germany; finished road networks in the Netherlands

Domestic processed material output rose. DPO/GDP fell. DPO/capita constant or slight rise. Dematerialization is not happening fast enough! Two caveats: a kg is a kg is a kg Large part of the problem is carbon

Material Input Flow Study from University of Leiden, Netherlands Measures input use into EU member countries, tries to apply weights to these physical flows according to their environmental impact.

Conclusions on Resource Flows Input flows and output flows per $ of GDP is falling. Input flows and output flows per capita are stable. In stable population countries, this is enough to generate SEG, but not enough elsewhere.