1. Ch. 20 Confronting the Environmental Kuznets Curve by Susmita Dasgupta, Benoit Laplante, Hua Wang, & David Wheeler

2. Introduction n Environmental Kuznets posits inverted-U relationship between pollution (dependent variable) and economic development (independent variable). n Grossman and Krueger (1993) named the EKC in honor of Simon Kuznets who found a similar relation b/w income inequality and economic development. n Usually cross section regressions are used. Turning point is around $5,000 to $8,000 in per capita income.

3. Introduction n Message: “Grow first, then clean up.” n Numerous critics of EKC theory and results. n But new results suggest the level of the curve is actually dropping and shifting to the left. n Stakes are high. Many countries per capita income is below the turning point. EKC implies increase in pollution first before turning. n Some believe in “race to the bottom” : firms relocate in countries desperate for jobs & willing to tolerate pollution

4. Theory & Measurement n Theory shows EKC can result if –Marginal utility of consumption is constant or falling –Disutility of pollution is rising –Marginal damage of pollution is rising –Marginal cost of abating pollution is rising

5. Theory & Measurement n Lopez (1994) shows EKC’s existence depends on preferences and production technology –Nonhomothetic preferences –Degree of risk aversion –Elasticity of substitution in production b/w pollution & conventional inputs –Corruption reduces environ. quality –Data comes from Global Environmental Monitoring System (GEMS) by United Nations on commonly regulated air and water pollutants –Research is mixed. Stern (1998) argues: EKC relation only found for suspended particulates & sulfur dioxide.

6. Theory & Measurement n Empirical work proceeding in several directions –1) improve data collection in developing countries –2) improve data on toxic emissions –3) curvature of EKC; higher order polynomial –4) compare time series studies with cross section studies.

7. How the Environmental Kuznets Curve Can Become Lower & Flatter n The Primary Role of Environmental Regulation –Several factors can affect pollution levels: »Scale or sectoral composition of output »Changes in technology »Regulation –Regulation is the dominant factor: 3 reasons »1) pollution gets higher priority after basic health and education are provided »2) more income for enforcement »3) more income and education empowers local communities

8. How the Environmental Kuznets Curve Can Become Lower & Flatter n Economic Liberalization –Elimination of gov’t subsidies often has environmentally beneficial effects because they occur in pollution intensive industries like steel –State owned plants in China have higher marginal abatement costs than private firms n Pervasive informal regulation –Community action can work

9. How the Environmental Kuznets Curve Can Become Lower & Flatter n Pressure from market agents. –Firms stock prices are affected by good and bad environmental news about the company n Better Methods of Environ. Regulation –Developing countries are moving away from command and control approach to market-oriented forms of regulation as used in the U.S.

10. How the Environmental Kuznets Curve Can Become Lower & Flatter n They are sanguine but have cautionary notes: four plausible concerns –1) Will countries need to suffer lower environ quality in the short run? –2) Risk of race to bottom in globalization –3) What about toxics? –4) Building regulatory capacity

11. The End