Issues

1. Issues • Sustainability and the Environmental Kuznets curve hypothesis • EKC  (environmental) Innovation • Global issues: Climate change policies  • The Kyoto protocol and environmental policy issues • The EU emission trading experience

2. Sustainability and the Environmental Kuznets Curves(EKC)

3. Key issues • Sustainable development • Weak and strong economic perspectives • Daly idea of zero growth • Renewable and non renewable resources • Environmental efficiency of economic systems • The critical role of innovation only engine for sustainaed economic growth and sustainability (Solow models) • Sustanaibility and sustaianed growth entangled issues: trade offs but also complementarities through the role of innovation

4. What is sustainable development? • SD is the achievement of a sustained path of economic growth which does not undermine future generation possibilities of consumption • We may define what “future generation” means • An orthodox economist would claim that this depends on our time preference  discount rate reasoning.. • The higher the discount rate, depending on consumption and oportunity costs factors, the less future benefits and costs are valued… • r = pure time myopic preference + consumption growth; otherwise equals tha market oppotunity cost, the foregone benefit of an investment

5. Recall that GNP=C+I • Recall that NetNP= GNP – depreciation of capital • Capital stocks dynamics depends on accumulation and depreciation

6. SD is linked to Total capital or natural capital? • Total capital = manmade + human capital + natural capital • Each capital stock is defined by a rate of growth, I – Deprec. • If I=dep, then capital is steady • Y=(TOT-K) • Thus, a first intuitive golden rule for SD is that total K should be at least constant, Inv should at least match depreciation.. • Genuine saving rule: INV >= depreciation

7. ..but.. • This may imply a decreasing natural capital stock, if natK is substituted by other forms • This is the western country history • i.e. arab countries management of non renewable resources • UK oil exploitation • In any case, rents from natural resource use should be re-invested..

8. Thus, weak sustainability may also imply a complete exhaustion of natural resources… • Strong sustainability is instead stressing the critical role of some natural capital forms…irreversible losses…eco-systemic losses • The genuine saving rule is applied to specific environmental assets • i.e. compensation projects • It works for renewable resources (forests, fishery..) • Striking difference between the management of non renew resources (the problem is a correct price and a path of exploitation which takes into account the existence of an alternative backsyop technology) and renewable resources, which often posses use and non use values…

9. SD is also possible in case a reduced amount of capital is inherited by future generations…. • …but this capital must be more productive..more efficient.. • We go back to the role of environmental innovation in triggering higher resource efficiency of the economy • A key issue is what he driving forces of innovation are: • Prices (neoclassic view) • Policy  which kind of policy…static reasoning demonstrate the higher efficiency of green taxes and tradable permits (over CAC)…dynamic efficiency should also be higher for economic instruments, but it is more an empirical matter • Firm internal strategies..Porter hp..firm gains from innovation in the long run, to achieve new competitive advantages…hp at macro and micro level • A weak version of the hp claims that in the long run the policy costs are lower than the induced innovation gains…NET benefits..

10. ..summing up.. • SD depends on the decision on how much investing in each period…(recall Y=C+I)..a part of the investment is in innovation (tech and organizational) • ..but even sustained economic growth (Solow Model) is possible only in presence of technological change enhancing factor productivity.. • SD intrinsically depends on innovation, which is an investment, which also depends on economic growth.. • The possibility of achieving a SD path relies on the extent to which innovation investments are capable of reducing the impact of a sustained economic growth.. • This issue is known as Delinking: environmental impact from economic growth

11. Delinking • Advanced economic systems have been characterised by a decreasing intensity of energy and materials per unit of output, driven by technological dynamics and regulatory pressures. OECD recently published a document (OECD, 2002) containing an updated evidence on the de-linking from economic growth, concerning diverse environmental indicators, such as climate change, air pollution, water quality, waste management, and material use.

12. Delinking may occur on a relative basis (the elasticity of the environmental impact indicator with respect to an economic driver is positive, but less than unity) or on an absolute basis (negative elasticity). • The assessment of both de-linking processes can be referred to the mostly applied research field concerning Environmental Kuznets Curves (EKC). • The hypothesis derives from the original analysis of Kuznets on the relationship between income level and income distribution

13. The EKC hypothesis is shortly that for many environmental impacts, an inverted U-shaped relationships between per capita income and pollution is documented. • The concentration of a certain pollutant first increases with income/production, reflecting a scale effect, more or less proportional, then eventually starts to decrease, de-linking from income even on an absolute basis. • More specifically, the hypothesis predicts that the “environmental income elasticity” decreases monotonically with income, and that it eventually changes its sign from positive to negative, thus defining a turning point for the inverted U-shaped relationship. • It does not derive from a theoretical model, it is an intuitive conceptual approach, inductive in nature..though some theoretical explanations have emerged…

14. EKC motivations • Supply side • Technology driven by economic growth (profits and investments..) • The share of cleaner activities in GDP increases with the scale of the economy (scale + composition effects) • As scarcity increases, market prices should reflect it..self-regulatory mechanism? • Environmental policy more likely in a developed economy  economic and political conditions needed • Property right enforcement (policy issue) • Demand side • Environmental quality is a normal luxury good (as culture)..higher incomes mean higher WTP for the environmental services..higher taxes are possible, new markets are profitable.. • Preferences change as the society develops..the marginal value of consumption is positive but decreasing • Environmental costs are increasing even steeply…growth benefits decreasing….even a simple marginal cost-benefit scheme may explain why delinking may occur • As it is evident, many forces play their role, in the interplay between supply and demand, and between policy and spontaneous market dynamics

15. Policy relevance • The EKC evidence may support the idea that no policy is needed…market forces and market dynamics are self-sufficient in inverting the income-environment link • BUT the environmental impact may be higher than what is defined as sustainable…policy efforts are needed to support and correct markets..affecting the shape of the EKC

16. Empirical evidence, which has mainly concerned air emissions, is still ambiguous. Some pollutants show a turning point, though it shared view that some critical externalities, like CO2 and waste flows, are monotonically rising with income. At best, relative de-linking may be occurring (Stern, 2004).

17. Air quality indicators • Local air quality (CO, sulfur, PM) seem to show an inverted U-shape with income. • Global pollutants either rise monotonically with income or eventually present very high turning point (not reached if not by US) • * private/public goods as far as countries are concerned..free riding on global commons  policy needed • Water indicators • The turning point is generally higher • EKC for some indicators (local issues) • N shape? (Borghesi, 1999)

18. waste • Empirical evidence on Delinking concerning environmental waste indicators is probably the scarcest. Contributions providing results for waste are rare. Cole et al. (1997) find no evidence for an inverted U-shape EKC curve concerning municipal waste • See the Mazzanti-Zoboli paper (2005) on waste and delinking…

19. There is currently no evidence concerning de-linking with respect to primary sources of waste in Europe (i.e. municipal and packaging waste), which have been targeted by waste-oriented European Directives aimed at reducing diverse environmental externalities associated to waste production and disposal

20. Some evidence • Turning points 2003$/per capita (international studies) • CO2: 37000-57000 • CO 16000 • Nitrates 25-41000 • Nitrogen oxide 25-29000 • Sulfur dioxide 10000 • Sulfur dioxide (trans) 12-13000 • Suspended particulates 12-13000

21. Water pollution • Differentiated EKC evidence by pollutants • From 3400$ for nitrates to 17700$ for lead • All other pollutants (cadmium, fecal coliforms, oxygen, arsenic, sulfur dioxide…) around 8000-13000

22. Deforestation • Some studies, but: • Low data quality • Deforestation is a complex issue: many drivers play a role • Evidence for tropical countries, latin america, africa • 9000 and 8000$ for Latin america and africa in 2001..higher than most country level around 5000 • Other study 10000-12000 in 2003$ • Other evidence (Panayotou and others) find lower turning points occuring at 1000-3000$...but we recall that the environmental peak matters… • Panayotou also argues that the most dramatic impact overall occurs between 1000 and 3000 per capita (China, India, Africa...)

23. The first methodological problem for the applied analysis is how specifying the EKC functional relationship. There is no consensus on it. • Some authors use second order polynomial, others have estimated third and even forth order polynomials, comparing different specifications for relative robustness. It is worth noting that neither the quadratic nor cubic function can be considered a full realistic representation of the income-environment relationship. • The cubic implies that environmental degradation will tend to plus or minus infinity as income increases, the quadratic implies that environmental degradation could eventually tend to zero. The issue is thus highly unresolved.

24. Shobee (2004) suggests a third order polynomial specification as more realistic relationship between environmental degradation and income per capita. This supports the credence of a logistic shape, wherein environmental degradation first accelerates, then decelerates, and finally falls. • Marginal environmental degradation is thus not modelled as constant. The issue still remains highly unresolved, with the EKC hypothesis relying mainly on empirical evidence. The theoretical foundations of the EKC are still ambiguous, though some contributions have emerged (Andreoni and Levinson, 2001).

25. Third or forth level polynomial could also lead to N rather than U shaped curves, opening new problematic issues in understanding the income-environment phenomenon for policymaking. • This N shape is justified by a non-linear effect by the scale of economic activity on the environment, which is difficulty to prove. • Finally, the use of the income factor only, without quadratic and cubic terms, would collapse the EKC analysis to the basic decoupling analysis. • For a simple presentation of EKC with a discussion of the core hypothesis see De Bruyn et al. (1998) and Stern (2004).

26. The aforementioned delinking hypothesis is tested by specifying a proper reduced form usual in the EKC field (Stern, 2004). • panel data framework, where the relative fit of fixed effect and random effect models is compared by the Hausman statistic • it allows the treatment of unobserved effects..but rare.. • Cross section frame (usually OCSE, world bank data..)..endogenity issue…causality relationship…??? • The need to move the analysis from cross country to single country and regional analysis..cross country analysis may hide some EKC specificity..we just estimate mean values…no policy value..

27. The hypotheses on Delinking are thus tested by estimating a reduced form regression model (i.e. waste): • log(waste/N)= 0i + t + 1Log(Consumption/GDP) it + 2 Log(Consumption/GDP)2 it + 3 Log(Consumption/GDP)3 it + ei • Where the first two terms are intercept parameters, which vary across countries and years (in a panel frame).

28. Literature review • An extensive literature has developed since the early 90s… • Biased on emissions at macro level…good availability…but rough data..need of panel regional studies… • Let’s see and comment some key works.. • The main objective is the finding of a turning point… • …but even the presence of a demonstrated turning point may not assure a Sustainable path.. • Irreversible losses over a certain environmental impact (critical threshold) • Developed and non developed countries…may the world economy sustain the impact of a EKC path in developing countries equal to that experienced by western economies? • The problem of consequential developemnt….with scarce resources… Innovation must be transfered in order to “cut” the developing countries EKC…this is a crucial issue within Kyoto

29. List and Gallet (1999), Ecolec • Sulfur dioxide and nitrogen oxide for 1929-1994, panel data • US State level • They underline: • Evidence at US state level • The issue of “omitted variables”..when including additional explanatory variables EKC evidence changes… • State level evidence is needed..they find that states with urban areas and more densely populated show a turning point at lower income levels..more policy attention?

30. Harbaugh et al (2001), NBER paper • They also test whether EKC evidence changes when the set of explanatory factors is extended, in addition to income terms… • Policy • Country/state features (weather, pop density, industrial/rural..) • Other control variables • TRADE intensity • Evidence may change even when • the set of countries is changed • The number of years is different • They show that for SO2, smoke and total susp part. The GDP/pollution relationship is sensitive to both sample seelction and empirical specification • No EKC evidence

31. TRADE • Some authors claim that for some pollutants the EKC evidence may only imply that more polluting activities are moved to other countries  from western to developing countries

32. Markandya et al (2004), FEEM • This is a EU12 specific study using a long time series..probably the most effective way of estimating EKC • Sulfur emissions 1850-1999: top value for 9 countries during 1970-1985 • Panel analysis: • Best fir with fourth order polynomial • Two turning points: 7000$ and 25000$ (lower emissions) per capita income • Individual country analysis show different model fits and different turning points • Then, UK only to account for the effect of Acts/regulations on emissions..including a dummy in policy years..no impact

33. McPherson et al (2005), ECOL-ECON • EKC and Threatened species..new issue • Cross country data..poor data availability • 113 countries in 2000 • Dep var: % of threatened species in 2000 + extinct in 1990-1999 • Results: • For birds and mammals, the curve seems rising up to around 10000-15000$, then species classified as threatened decreases • Population density negatively impacts • Islamic and post-communist and communist countries have more species as threatened..property rights definition? Green policies in democratic countries…this opens a new public choice political issue (growth-democracy-environmental quality..what is the causal link?)

34. European waste case study (Mazzanti and Zoboli, 2005) • Results indicate that stronger efforts are needed in order to increase the waste-oriented efficiency of economic processes. They confirm the fact that, concerning primary waste issues, even relative de-linking is questioned on a average European level. • Environmental policy makers should remain hesitant about the idea of economic growth as self-sufficient driving force of environmental improvements, the reality is much more complex for most environmental indicators. • The income elasticity of primary non hazardous waste flows in observed European countries is likely to be, or become in the medium term, less than one, but it is certainly not negative

35. Final points • Different polynomial specifications are tested by including as • (i) dependant variable waste per capita and waste in absolute terms, • (ii) independent variables either household consumption or GDP per capita, thus testing the hypothesis which indicates that consumption is a more appropriate driver for waste. • In fact, recent studies (Rothman, 1998; EEA, 2003a,b) point out that for municipal and packaging waste the proper economic driver/indicator is not GDP, but household consumption instead. This is a key issue on both conceptual and statistical grounds.

36. ..from EKC to environmental Innovation • The EKC framework has confirmed the need of triggering innovation and then transferring innovation to industrializing countries… • since property rights definition, market functioning,env. policy and income are four main sources of innovation • Interesting study by Komen et al (1997) on the relationship between income and public R&D in environmental protection activities (not abatement) • They find an income elasticity not different from one • It shows the relevancy of the income  R&D  innovation  growth + SD complex set of dynamic links

37. You may find papers at www.deit.economic.unife.it publications • Two 2005 papers by Mazzanti-Zoboli, also some 2004 papers on other issues… • You may also look at my course page in www.economia.unife.it to download publications • My email is ma.maz@iol.it • Good sites: • www.feem.it • www.rff.org • CSERGE/UCL site • Good journal is Ecological economics, JEEM, Env&ResEcon, Land economics