Prosperity bends the curve
"Distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long term. Goals for more growth should specify more growth of what and for what." - Simon Kuznets, the creator of Gross National Product (GNP), the predecessor to GDP.
The Kuznets Curve expresses a theory, first advanced by the economist Simon Kuznets, that nations experience a rise in income inequality as they develop, but after a certain income per capita level is reached further economic development results in a decline in income inequality.
A similar relationship between economic development and environmental degradation was first recognised in 1992 as concentrations of sulphur dioxide and GDP per capita were found to exhibit a similar inverse ‘U’ shape. It became known as the Environmental Kuznets Curve (EKC).
The EKC suggests that economic growth first leads to an increase in environmental degradation. However, once GDP reaches a certain level the relationship goes into reverse. Further economic growth is associated with a decline in environmental degradation.
As economies shift from being primarily based on agriculture to one centred on industry, increased amounts of resources are exploited to drive growth, this in turn results in an increase in air and water pollution. The negative externality of environmental damage goes unpriced in the race to increase economic development.
After a certain turning point is reached the relationship between economic growth and environmental degradation changes - there is a ‘decoupling’. Thereafter, further increases in economic development are associated with a decline in the environmental impact.
Part of the reason for this is the shift from an industrial-based economy to one that is service-based - the de-materialisation of the economy. The other factor stems from a change in the preferences of citizens, one where pollution is too high a cost for further economic growth, and towards an economy that increasingly puts a value on negative environmental externalities. Greater awareness leads to the introduction and greater enforcement of environmental regulations, and increases the incentive to invest and deploy technology improvements that can reduce or eliminate the environmental impact.
It is often when environmental damage is at its worst and most acute in the minds of citizens that the government (and society at large) resolve to actually do something about it. In the UK at least, that point came in 1952. Smoke generated from the excess burning of coal combined with fog, resulting in a thick layer of smog in major cities such as London, Glasgow, Leeds and Manchester. It became known as “The Great Smog of 1952” and resulted in thousands of deaths. The smog prompted Parliament to pass The Clean Air Act four years later. The Act of 1956 and another Act in 1968 forced urban households to stop burning the most polluting grade of coal (colloquially known as “nutty slack”), and encourage them and nearby factories to switch to smokeless fuels. It marked an initial turning point in the environmental impact from economic growth in the UK.
The association between economic development and environmental degradation is likely to differ depending on the cause and type of pollution and the ease with which it can be abated through fuel substitution and regulation. For example, the UK was able to impose regulations that forced householders to switch fuels. Meanwhile, in the US the Clean Air Act Amendments of 1990 (CAAA) and the cap-and-trade system for SO2 pollution incentivised power generators to switch to low-sulphur thermal coal (see The great sulphur dioxide allowance bull market: What lessons can we learn from the first cap-and-trade system?).
Nevertheless, the turning point for the UK’s relationship between economic development and carbon emissions would not come until 1985. As this analysis from the UK’s Office for National Statistics (ONS) shows, UK economic growth decoupled from carbon emissions when UK GDP per head reached £16,667 (2013 prices), corresponding to UK CO2 emissions of around 586 Mt. Over the next three decades real GDP per head grew by around 70%, while carbon dioxide emissions declined by about one-third. Central to the decline in carbon emissions was the switch from thermal coal power generation to natural gas, and subsequently the emergence of renewable energy generation.
One of the criticisms of the EKC is that it exaggerates the decline in environmental damage after the turning point is reached. For example, conventional wisdom suggests that as an economy moves towards a largely service based economy, the dirty business of actually making things is offshored to where they can be made more cheaply and to lower environmental standards. The products are then imported back into the country resulting in indirect emissions not accounted for within the territorial boundaries of an economy.
However, as
explains using data from Our World In Data, offshoring of emissions just isn’t that big of a deal: “Here’s a simple graph where we can see how much the consumption-based measure changes the picture for the biggest emitters. The U.S. offshores a little bit of emissions, the EU offshores a bit more (about 18%). About 10% of China’s and India’s emissions represent offshoring, while the rest of Asia is basically neutral.”
Another criticism of the EKC is that it implies that policymakers in advanced economies (those that have passed the turning point), can simply focus on increasing economic growth, safe in the knowledge that environmental degradation will eventually decline to negligible levels. It also implies that developing economies are likely to follow a similar pattern, and that if we only help to nurture their economic development (perhaps via investment and an expansion in trade), they will get through the turning point quicker, and be on the same downward sloping part of the EKC that more advanced economies currently find themselves on.
As with other ‘Curves’ named after the economists that discovered relationships between two variables in the past (i.e., Phillips, Laffer, Engel, etc.), there are no guarantees that the association continues to hold in the future. Nor should policymakers hold onto the belief - as some did in the past - that merely by tinkering with one variable you can control the other. To do so ignores the underlying reasons for why the relationship exists in the first place.
In the example of the EKC it may include first mover advantage (the relationship appears to be strongest in those economies that industrialised first), and the existence of a strong government (such that strict environmental taxes and regulations can be adopted and enforced), the availability of carbon intensive resources (such as coal, oil and natural gas), and the structure of the economy (how reliant is it on heavy manufacturing).
Rather than an inverse ‘U’ shape, the EKC for carbon emissions or other forms of environmental degradation may show an entirely different shape. The ‘U’ may be elongated indicating the time it takes to eliminate carbon emissions given the difficulty of abating emissions that are embedded in much of the economy. For some countries there may be an inverted gamma whereby the positive impact on carbon emission reduction becomes significantly smaller after the turning point is reached.
A recent paper by academics at the Ulsan National Institute of Science and Technology in South Korea found that 26 countries confirmed the EKC in terms of economic and statistical significance. Of these, 16 economies were found to have crossed the turning point (decoupled countries), whereas 10 had not (non-decoupled countries). While most countries that crossed the turning point portrayed an inverted U-shaped relationship between the income per capita and carbon emissions (e.g., Germany, France, New Zealand, Singapore, Sweden, and Switzerland), a few exhibited a gamma-shaped relationship (e.g. Australia, Canada, and Japan). Needless to say, other studies find different results, with some even questioning the validity of the EKC even in those countries where others say it appears strongest, while other researchers suggesting the relationship may be more widespread.1
The EKC is a polarising concept in environmental economics. It strikes at the heart of two opposing views as to how policymakers should go about incentivising cutting carbon emissions, while also ensuring that their economies remain vibrant.
On the one hand unabated economic growth is seen as the enemy by many environmentalists. Governments should introduce policies that cut consumption, and we should focus on a broader measure of economic development, one that isn’t wedded to simply measuring the rate at which the value of the economy’s output increases.
Others (including this author), argue that technological innovation and productivity are the engine of economic growth. Here, price signals that enable resources to be allocated efficiently, and government support that tackles the barriers to innovation and adoption are the priority - especially when it comes to tackling climate change.
Almost a century before London was smothered by the “Great Smog”, the city’s dwellers were holding their noses through the “Great Stink” of 1858. So many people were dying of cholera that life in the city became unbearable. A year later the authorities finally began to build a functioning sewage system. Economic development takes many forms, and yes it has come at a cost, but without growth we would not have the resources to invest in the infrastructure and technology to tackle the problem.
And so, rather than stymie less developed economies from economic progress, more advanced nations should look to invest in their energy transition and industrial decarbonisation, finance the infrastructure necessary to clean up their environment, incentivise the introduction of policies such as carbon pricing and other regulations, and most importantly, boost trade and investment to help support their economic growth.
Accelerate their progress through and beyond the tipping point, not holding them back.
Since 2005, 32 countries with a population of at least one million people have absolutely decoupled emissions from economic growth according to The Breakthrough Institute https://thebreakthrough.org/issues/energy/absolute-decoupling-of-economic-growth-and-emissions-in-32-countries
Luzzati et al. (2018), who find little or no evidence for the existence of a Kuznets curve for CO2 emissions. https://www.sciencedirect.com/science/article/abs/pii/S0301421518304646