Environmental Economics
Lecture Seven: Growth, Development and
Environment
Abdiaziz Ahmed
Department of Economics & Development Studies (DEDS) (University of Nairobi)
5th November 2024
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Nexus economic growth & environment
Complex and dynamic relationship. Technology plays an important role in the
relationship.
Example: renewable technologies, better fuel efficiency, electric cars.
The relationship between environment and growth is captured by the Environmental
Kuznet Curve (EKC).
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Nexus economic growth & environment
Measurement of sustainable development
Bruntland commission 1987: development that meets the needs of the present
without compromising the ability of future generations to meet their own needs.
Recent studies define a sustainable path as one along which intergenerational
well-being does not decline.
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Nexus economic growth & environment
To keep wealth per capita from declining requires that the growth rate of wealth be
greater than or equal to the growth rate of population.
Comprehensive wealth (total wealth) is made up of produced capital (buildings, roads,
machinery and equipment), natural capital (minerals, forest, agricultural land), and
intangible capital (a broad category that includes human, social, and institutional
capital).
Comprehensive wealth is different from GDP.
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Saving for a sustainable future
Increase in comprehensive wealth equals adjusted net saving (ANS), genuine saving,
defined as gross national saving adjusted for the annual changes in the volume of all
forms of capital
NS = S − Dm (made capital)
ANS = S − Dm − Dn (natural capital)
If enough is saved each year to cover the depreciation of both made and natural
capital, the economy can sustain its wealth and its level of consumption.
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Market failure
Correcting market failures could provide efficient resource use, reduce environmental
degradation, and generate sustainable development.
Environmental degradation occurs because market participants do not take into
account the full costs of their actions on the environment.
Fiscal policy (Tax) on property rights
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Market failure
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Definition of Common Pool Resources
1. It is difficult to exclude anyone from using them.
2. Use by one person reduces the availability of that resource for use by
others.
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Government’s Role in Common Resources
Government acts as the owner of the common resources.
How do the regulators know the optimal levels of access and output?
Governments need to know the characteristics of both producers’
costs and users’ demand for the products of a common resource.
Pollution reduces welfare and affects others: poor health, unsightly
environment, lower property values, fewer and more expensive
recreation possibilities, etc. They create the usual marginal external
costs (MEC).
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Marketable Permits
Pollution rights. Users are granted the right to harvest common pool
resources.
Two scenarios:
1. When rights cannot be sold
2. When rights can be purchased and traded
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Economic Growth and the Environment: Competing
Theories
Growth is detrimental to the environment
The increased extraction of natural resources coupled with the
accumulation of waste.
The concentration of pollutants will overwhelm the regenerative capacity
of the biosphere.
Lead to irreversible environmental damage and lower human welfare,
despite rising national incomes.
Solution: Economic growth must cease, and the world must make the
transition to a steady-state economy.
Critique: Rhetoric versus reality. Ethical and moral issues.
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Economic Growth and the Environment: Competing
Theories
Growth is good for the environment
The market system will provide an optimal outcome for society, with a
socially ideal level of environmental degradation.
Assumptions:
As incomes rise, people will demand goods and services that are less
material-intensive.
As incomes rise, individuals will push for improved environmental
quality.
Result:
Adoption of increasingly stringent environmental protection
measures.
Environmental degradation decreases monotonically with the level of
economic development.
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Environmental Kuznets Curve
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EKC Conceptual issues and problems
However,
Theoretical models suggest possibility but not inevitability
Lots of exceptions (particularly with respect to CO2 )
Results tend to be sensitive to econometric specification
Even if one believes the results, parameter estimates suggest pollution will get
worse in most developing countries before it gets better
Hard to show that income is a causal factor
Income may simply be positively correlated with good government
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Critics of the EKC concept
Empirical evidence for the EKC is weak
Developing countries specialise towards labour and natural resources;
Developed countries specialise toward human capital and manufactured capital
intensive activities.
Trade increase impacts in developing countries while reducing them in
developed countries.
The difference in stringency of environmental regulations between countries may
also cause polluting activities to gravitate towards developing countries.
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Critics of the EKC concept
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The Environmental Kuznets Curve (EKC) Pessimists
Critiques of the EKC have developed along two tracks
1st track: certain indicators, like CO2 and municipal solid waste, actually rise
with increases in per capita income
2nd track: EKC does not exist because: omission of important variables in
regression analyses particular functional forms used “pollution haven” hypothesis
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Institutional Quality and Environmental Sustainability
Panayotou (1997) uses composite index of institutional quality to
investigate growth-environment relationship.
This variable has a significant effect on environmental degradation.
Thus “the efforts of pro-environment reforms should focus on
improving the quality of institutions and policies rather than
attempting to slow down economic or population growth” –
Panayotou (2003).
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Institutional Quality and Environmental Sustainability
Hall and Jones (1999) and Rodrik (1999) have found that
institutions have a large and significant effect on cross-country
income differences.
Quality of institutions affect both economic growth and
environmental degradation.
Thus, improving the quality of institutions can have substantial
growth-enhancing and environment-
improving effects.
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