Environment-growth interactions: theory & evidence 1.The Environmental Kuznets CurveThe Environmental Kuznets Curve 2.Standard model of resource allocation, production, trade and welfareStandard model of resource allocation, production, trade and welfare 3.An open economy with pollutionAn open economy with pollution 4.Empirical EKC studiesEmpirical EKC studies 5.Conclusions and discussionConclusions and discussion 6.Appendix: Measuring pollution and economic welfareAppendix: Measuring pollution and economic welfare

The ‘environmental Kuznets curve’ With economic growth, pollution intensity first rises, then declines: z = z(Y/P) z’ > 0; z” < 0.

Components of EKC Scale effect (economic expansion) Composition effects –Relative price changes –‘Unbalanced growth’-- from several sources Technique & preference effects –Production technology –Consumer preferences & policy pressures

Factors affecting EKC shape Exogenous market influences (‘globalization’) Property rights Externalities Policy ‘accidents’ (e.g ISI strategies affecting ind’l & ag growth) *All have economy-wide implications *Spatial dimensions may also be important

A note on ‘micro’ vs. ‘macro’ approaches Agents’ behavior (e.g. firm/farm) is dynamically linked to macro level changes. –Economy-wide or global changes affect decision- making by micro units, through prices, etc. –Behaviour of micro-units in aggregate affects macro outcomes: outputs, prices, employment, income distribution, and environmental externalities –Indirect and ‘loop back’ effects can be very important Micro and macro approaches are complementary. Both are required. TOC

A standard GE model Assume: –Two goods produced and consumed –Each good is produced using two factors Constant returns to scale –One factor (labor) is intersectorally mobile; the others are “specific” to sectors –Markets are complete and competitive Prices are set in world markets

8 Spot test! 1.Use the diagram to show the value of total income. 2.For a given set of consumer preferences, show the pattern of trade. 3.Demonstrate that (a, b) is an equilibrium (hint: Walras’ Law).

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Spot test! What happens to factor returns when relative output prices change? 1.Returns to specific factors rise (fall) as sectoral output rises (falls) 2.Wage change depends on labor- intensity of expanding sector

Spot test! 1.What happens to the structure of output as specific factor endowments increase? 2.What is the effect of technical progress in a sector? 1.The sector using that factor expands--and the other contracts 2.That sector’s output expands, and the other’s output contracts TOC

An open economy with pollution The Antweiler, Copeland, Taylor (2001) diagram –‘Clean’ and ‘dirty’ goods –Comparative advantage in dirty good –Tariff on imports of clean good Effects of growth or trade: –scale, composition, technique

Growth and pollution E.g. factor endowment growth Scale and composition effects from growth –and factor abundance/comp. adv effects Technique effects dependent on institutions (among other things)

Hypothesized motives for environmental change Factor abundance –Comparative advantage drives NR exploitation rates in open economies ‘Pollution haven’ –Lack of property rights or regulations permits ‘free disposal’ of pollution Interactions –Openness --> pollution when prop. rts. absent. TOC

Empirical EKC studies Most general model: y it =  i + ∑ j  ij x itj for i in {country}, j in {explanatory variables} and t in {time}, where y it is some measure of env/NR, x itj is an explanatory variable Some other considerations: Set of non-income RHS variables Model specification Data availability (X-S, panel, quality)

Empirical EKC ‘tests’ E.g. Panayotou 1993, SO 2 emissions: ln(S/P) = – ln(Y/P) – 0.51[ln(Y/P)] 2 Implication: ‘turning point’ for emissions intensity -- for the average country in sample. Other LHS variables: CO2, water quality, deforestation, TSP, … Other RHS variables: additional terms & interactions (openness/trade intensity, institutions, Communist, pop. density, …)

Is there an EKC in Asia? Empirical studies: –Industrial emissions-- maybe. –Deforestation, water and soil resource depletion--no robust evidence of EKC (Cropper and Oates, Stern, Common & Barbier, …) –Yet experience of wealthy countries suggests that EKC concept remains a useful working hypothesis. TOC

Summary and conclusions Assumptions about optimizing behavior Assumptions about markets and technology Assumptions about trade Models must make assumptions explicit and be demonstrably consistent Complications can be introduced, but at a cost Target of analysis is important. Is it the environment only? Or a broader concept of welfare? TOC

For next sessions Review duality and basic concepts, if necessary: –Expenditure, cost and revenue functions –Trade expenditure function –“Hat” calculus Look at OEE Ch. 2 models, and/or Ulph (1999). TOC

Appendix: Environment and economic welfare ACT model tells us what happens to pollution. But consumer utility: u = u(c, -z) –Price or endowment changes affect c as well as z: what is the change in net welfare? –example: trade liberalization

Spot test! Q. In the previous example, what is the optimal tariff, and how is it calculated? A.Where absolute values of slopes of R and C are equal (marginal environmental benefit=marginal cost in terms of consumption) B.Q. What is the optimal tariff on imports of a dirty good? C.A. t = 0. TOC