Economic Growth and The Environment M. Scott Taylor University of Wisconsin Department of Economics

The One Industry Case

Decomposition

The Many Industry Case

The Many Industry Case

Economic Growth Implies a positive scale effect, Y is growing For Pollution to fall we need:

Our Hope is Income Growth Divide Y growth into Y/N and N growth Assume Y/N growth leads to A Mix of Cleaner Industries Cleaner Techniques ZPG

Techniques must change A changing composition of output cannot save us in the long run. We need

Problem Continual growth with environmental improvement requires falling emissions per unit of output. But lowering emissions per unit of output comes at increasing cost, because of Diminishing Returns.

Implication Pollution abatement costs should rise precipitously This lowers the return to investment This should choke off growth

Potential Solution Technological progress holds costs down The return to capital accumulation is not choked off Growth with environmental improvement is possible

Could it be True? 3 pieces of evidence in favor 2 Caveats

Exhibit A Emissions per dollar of output are falling

Exhibit B 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.

Exhibit C The Environmental Kuznets Curve Many pollutants at first rise with development and then fall This holds for many pollutants, different countries, and time periods

The Case Technological Progress in abatement is needed to control costs and sustain growth Evidence, although sketchy, does indicate large role for technological progress in abatement. New environmental problems will be dealt with in turn and successfully.

Caveat 1 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 different?

Caveat 2 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?