Tuesday, April 21, 2009

Grow rich to go green!

NYT has a nice summary of the Environmental Kuznets Theory school of environment and economic growth that debunks the conventional "limits to growth" theories (as countries develop, they use more resources, degrade the environment more, and thereby the ongoing phase of global economic development, especially that of the emerging economies, is unsustainable) and argues that "the richer everyone gets, the greener the planet will be in the long run". The Kuznets graph is shown below.

Each line is an environmental Kuznets curve for a group of countries during the 1980s. The levels of sulphur dioxide pollution (the vertical axis) rise as countries becomes more affluent (the horizontal axis). But then, once countries reach an economic turning point (a gross domestic product close to $8,000 per capita), the trend reverses and air pollution declines as countries get richer. In this analysis by Xiang Dong Qin of Clemson University, the green line shows countries with strong protections for property rights; the red curve shows countries with weaker protections.

In the early nineties, Gene Grossman and Alan Krueger had made the path breaking finding that economic growth does not result in deterioration of environment quality, and that it only brings an initial phase of deterioration followed by subsequent phase of improvement.

Bruce Yandle, Madhusudan Bhattarai, and Maya Vijayaraghavan (full paper here) explored the Grossman-Krueger and other studies to argue that apart from rising incomes, improvement of the environment also depends on government policies, social institutions, and the completeness and functioning of markets. They write, "Because market forces will ultimately determine the price of environmental quality, policies that allow market forces to operate are expected to be unambiguously positive. The search for meaningful environmental protection is a search for ways to enhance property rights and markets."

Jesse Ausubel and Paul Waggoner have examined the effect of economic slumps on energy use and emissions in the US and have found little evidence of any ong term shifts induced by those episodes. It therefore would appear that economic growth, markets, and appropriate institutional and regulatory frameworks are all essential components in the campaign to improve environmental quality. And, faster the developing economies grow, earlier will this transition happen.

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