Environment and Development
Environment and Development 282
ENVIRONMENT DEVELOPMENT TRADE-OFF:
The Environmental Kuznet Curve (EKC)
• In the late 1980’s and early 1990’s some economists
(Krueger and others) took up some studies to
explore the relationships between level of economic
development and environmental quality across
countries.
• Plotting the concentration of certain key pollutants
against per capita income of levels of countries
some studies came up with a pattern of scatter
shown in figure-1.
Environment and Development 283
Pollution The Environmental Kuznet Curve
Early Stage Later Stage
of Economic of Economic
Development Development
Per Capita Income
Figure - 1
Environment and Development 284
The Environmental Kuznet Curve (EKC)
• This scatter indicated a relationship between per
capita income (PCI) and pollution levels of the
shape of an inverted U.
• Owing to the remarkable similarity of this pattern
to Kuznet’s findings about two decades earlier
between PCI and inequality across countries, this
relationship came to be known as the
Environmental Kuznet’s Curve (EKC).
Environment and Development 285
The Environmental Kuznet Curve (EKC)
• The associated hypothesis with this curve has been
put as thus:
Environment and Development 286
ENVIRONMENT DEVELOPMENT TRADE-OFF:
The Environmental Kuznet Curve (EKC)
• The EKC hypothesis points towards a trade-off
between environment and development i.e. it
seems to suggest that underdeveloped countries
will have to forgo environmental quality for the
sake of attaining a higher level of development.
• It further suggests that environmental quality will
be taken care of as developing countries attain
further level of development.
Environment and Development 287
ENVIRONMENT DEVELOPMENT TRADE-OFF:
The Environmental Kuznet Curve (EKC)
The rationale behind the EKC hypothesis can be
summed up in the following quotation:
“At low level of development both the quantity and intensity
of environmental degradation is limited to the impacts of
subsistence economic activity on the resource base and to
limited quantities of biodegradable wastes. As economic
development accelerates with the intensification of
agriculture and other resource extraction and the take-off of
industrialization, the rates of resource depletion begins to
exceed the rates of resource regeneration, and waste
generation increases in quantity and toxicity. At higher
levels of development, structural and services, coupled with
increased environmental awareness, enforcement of
environmental regulations, better technology and higher
environmental expenditures, result in leveling off and
gradual decline of environmental degradation.” (Panayotou
1993)
Environment and Development 288
ENVIRONMENT DEVELOPMENT TRADE-OFF:
The Environmental Kuznet Curve (EKC)
• Empirical evidence in support of the EKC is not yet
conclusive to establish the observed trade-off or
the hypothesis as a law.
• Studies based on longitudinal data of developing
countries have not come out as yet.
• The possibility of such studies refuting the trade-off
(the way the Kuznet’s inverted U hypothesis was
refuted by such studies that came up in 1970’s)
cannot be ruled out.
Environment and Development 289
ENVIRONMENT DEVELOPMENT TRADE-OFF:
The Environmental Kuznet Curve (EKC)
• Even if the trade-off was valid for the past
experiences its policy implication for future of
developing countries may not be very useful.
• An obvious policy suggestion which can be drawn
from the trade-off is that developing countries
should focus primarily on growth and economic
development goals without bordering much about
environmental protection in their early stages.
• Because growth itself will take care of
environmental quality at a later stage.
Environment and Development 290
ENVIRONMENT DEVELOPMENT TRADE-OFF:
The Environmental Kuznet Curve (EKC)
• However, such a strategy can be mistaken (as was
the growth oriented strategy of developing countries
like India in the early planning era without much
effort for reduction of poverty, believing that poverty
was supposed to be mitigated by trickle down effect
of high growth)
• Moreover, it is important to note that many
components of environmental quality such as bio-
diversity are non-reversible if degradation exceeds a
threshold levels.
Environment and Development 291
ENVIRONMENT DEVELOPMENT TRADE-OFF:
The Environmental Kuznet Curve (EKC)
• In this context it seems that, despite the ambiguity
associated with the concept, sustainable
development would be a better strategy.
• Moreover, a developing country today need not go
through the same course of development on which
the rationale for the EKC hypothesis has been
formulated.
• For instance, countries like India have made the
transition from a primary sector dominated
economy to a service sector dominated economy
without going through the phase dominated by the
industrial sector.
Environment and Development 292
ENVIRONMENT DEVELOPMENT TRADE-OFF:
The Environmental Kuznet Curve (EKC)
• Such a pattern obviates the need for industrialization
related environmental degradation in the course of
economic development.
• Even if a country needs and chooses to industrialize it
can leap-frog the course of technological advancement
and adopt technologies, which are substantially less
polluting than the technologies used by countries which
industrialized in the past
• The environment-development trade-off might have
existed historically. But it is not inevitable for a
contemporary developing countries to sacrifice
environment quality for the sack of expediting the pace of
development.
Environment and Development 293
Environment and Development 294
SUSTAINABLE DEVELOPMENT: BACKGROUND
The ‘Limits to Growth’ Report
Energy crisis of 1970s precipitated by oil price
jumps
Market failure in allocation of environmental
resources
World Commission on Environment and
Development instituted in 1983
The report ‘Our Common Future’ articulated the
concept
Environment and Development 295
SUSTAINABLE DEVELOPMENT: DEFINITION
Development that meets the needs of the present
without compromising the ability of the future
generations to meet their own needs
Appealing but ambiguous. Some called it
delightfully vague
Present needs?
Needs of the future generations?
Requirements to meet the future needs?
Difficult to operationalise.
Environment and Development 296
SUSTAINABLE DEVELOPMENT: ECONOMIST’S
PERCEPTION
Resonates with Economists’ conceptualization of
INCOME, i.e., maximum consumption one can have
in a period while remaining as well off in the end as in
the beginning of the period.
In that light sustainability has been interpreted as an
obligation to conduct ourselves so that we leave to
the future the option or capacity to be as well off as
we are.
Hence sustainability requires that the stock of capital-
manufactured, human and natural, is left
undiminished.
This in turn needs restricting consumption to save
resources for asset creation and conservation and
protection of the environment
SUSTAINABLE
Environment DEVELOPMENT
and Development 297
SUSTAINABILITY: Weak and Strong
Weak Sustainability Strong Sustainability treats
views manufactured and natural and man made
natural capital to be capital to be complementary
substitutable
So renewable resources to be
Therefore what matters is used only at rates at which
the total stock of these they regenerate. Use of non-
assets renewable should be
minimized.
Monetary valuation of
stocks possible Resource stock have to be
measured in physical units
Environment and Development 298
EFFORTS AND INDICATORS FOR MONITORING
SUSTAINABILITY
Environmentally Adjusted National Income or
Green NDP (=NDP-Depletion of Natural
Capital-Environmental Damage)
Genuine Savings
Integrated Environmental Economic Accounting
Environment and Development 299
GREEN NATIONAL ACCOUNTS
Degradation of environmental capital is like
depreciation of man-made capital
Subtract from gross income to get net income
Not doing it is steering with a faulty compass
Environment and Development 300
GREEN NATIONAL ACCOUNTS
System of National Accounting (SNA) as a
measure of SD
Income as given by Hicks- that portion of the
value of output which could be consumed in any
year without reducing one’s wealth.
Need for adjustment in conventional accounts
Environment and Development 301
GREEN NATIONAL ACCOUNTS
• Two approaches for incorporating corrections:
▫ Adhoc deductions for depreciation in natural
capital stocks
▫ Includes the same effects but values them
consistent with economic theory
Three adjustments
Environment and Development 302
ADJUSTMENTS IN NATIONAL ACCOUNTS
For NR resources, deduct from NNP an amount equal
to the value of annual production (less discoveries)
multiplied by the difference b/w P and MC
For RR, annual production is deducted from annual
growth and then valued using P and MC term
For pollution, amount equivalent to change in stock of
each pollutant multiplied by its marginal abatement cost
Green NNP = NNP- (p1-mc1) NR-(p2-mc2) R-v( S)
v= marginal cost of abatement for pollution stock S
Environment and Development 303
GREEN SAVINGS
• Pearce and Atkinson, 1993
• Compares reinvestment in an economy with
depreciation of both natural and man made capital
GS = S - θm- θn
• Positive genuine saving means that the weak
sustainability norm is fulfilled. (natural and man
made capital are perfect substitutes)
Environment and Development 304
POVERTY REMOVAL-SUSTAINABILITY TRADE OFF
• Removal of poverty needs increased
consumption of the poor
• Poverty reduction is essential to stop poverty-
environmental degradation downward spiral
• Economic betterment reduces birth rate and
population growth and hence serves
sustainability
Environment and Development 305
ISSUES FOR SUSTAINABLE DEVELOPMENT
• Economic growth is needed and desirable.
• Can needed growth be attained?
• What stress on environment would it put?
• How to make it green growth?
• How to ensure sustainable development?
Environment and Development 306
Environment and Development 307
SEEA: BACKGROUND
• SEEA is the result of concern for sustainability
• World Commission on Environment and
Development in its report ‘Our Common Future’
defines Sustainable Development as ‘development
that meets the needs of the present without
compromising the ability of future generations to
meet their own needs’
• Appealing but ambiguous. Some called it
delightfully vague
Environment and Development 308
COMPONENTS OF SEEA
• Asset account
• Pollution and material flow account
• Environment protection & resource management
account
• Macroeconomic indicators
Environment and Development 309
COMPONENTS OF SEEA: Asset Account
Extends the Asset Balance of SNA to include Natural
Capital,, i.e., free gifts of nature such as mineral
deposits, forests, fish stocks etc.
Structure of Asset Account:
• Opening balance
• Change during the year (depletion/depreciation,
gross capital formation, other volume change)
Due to economic activity – extraction, harvest
Due to natural processes – Birth, Death, Growth
• Closing balance
Environment and Development 310
COMPONENTS OF SEEA: Asset Account
Basic Concern:
Should include only economically proven
stocks? Or also a part of the probable stock?
Valuation Methods
-Net Price Method
-Present Discounted Value Method
Environment and Development 311
COMPONENTS OF SEEA: Asset Account
DEPRECIATION / DEPLETION
For non-renewable assets ‘value of
extraction at net price’
For renewable assets ‘value of harvest in
excess of sustainable yield’
A relatively new practice is to measure it
as the change in asset value from year to
year
Environment and Development 312
COMPONENTS OF SEEA: Pollution &
Material Flow Account
The material flow component of SNA is extended
to incorporate generation of pollution in production
and consumption
Append rows below the material flow matrix to
record different pollutants generated in different
industries
Similar exercise for final demand elements too
Environment and Development 313
COMPONENTS OF SEEA: Pollution &
Material Flow Account
Monetary Account of Pollution
Maintenance/Avoidance Damage Cost Approach
Cost Approach: - Estimated by adding up
-Loss of agricultural
Set appropriate pollution productivity
standards
-Loss of productivity of
Estimate cost of bringing other assets
pollution level to these -Accelerated corrosion of
standards from the existing structures
levels
-Health damage
Environment and Development 314
COMPONENTS OF SEEA: Environment
Protection and Resource Management
Account
Rearranges information in the SNA to make
spending on environment protection and resource
management more explicit
A satellite account
Environment and Development 315
COMPONENTS OF SEEA: Macroeconomic
Indicators
Physical Indicators:-
Total Material Requirement (TMR)
• Materials used are added up using weights to get
TMR
• Dematerialization (reduced material requirement
per unit of output) is taken as a measure of
sustainability
Environment and Development 316
COMPONENTS OF SEEA: Macroeconomic
Indicators
Monetary Indicator:
Depletion Adjusted NDP (daNDP) =
NDP – Depletion of natural capital
Environmentally Adjusted NDP (aeNDP) =
NDP- (Depletion of natural capital) – (Environment
degradation based on maintenance cost approach)
Genuine Income (gY) =
NDP- (Depletion of natural capital) – (Environment
degradation based on damage cost approach)
Environment and Development 317
COMPONENTS OF SEEA: Macroeconomic
Indicators
Supporting Indicator:
Genuine Saving =
(Gross Domestic Saving) – (Consumption of fixed
capital) -(Depletion of natural capital) –
(Environment degradation based on damage cost
approach)
Positive genuine saving means that the weak
sustainability norm is fulfilled
Environment and Development 318
MODELING BASED INDICATOR
Sustainable National Income
The NI the economy would have had if it had met
all the environmental standards using existing
technology
Green NDP
The hypothetical NDP if the environment pollution
costs were actually met
