Tuesday, November 11, 2014

Environment and income

The relationship between income and the environment is an interesting topic to consider on many levels.

In terms of per capita income, we might associate higher income with higher concern for the environment for a couple of reasons.  Countries with higher per capita income have already progressed through a long period of economic growth and development, have witnessed loss of environmental quality and may develop preferences for higher environmental quality.  People may develop a sense of environmental awareness only after they've seen damage first hand.  Further, "green" goods and services are often more expensive than goods that create more environmental harm.  In short, wealthier households 1) may have a preference for and 2) can afford to buy organic products, solar panels and electric vehicles.

There is a lot of data that you could use to support these arguments, including time series analysis of polls addressing concern for the environment (note that the dips in the green line are highly correlated with recessionary periods. Also note the spike during the Deep Water Horizon spill), cross section analysis of spending on "green" products by income levels, or membership in environmental organizations by income levels. 

In terms of aggregate income measures, economic growth tends to result in a structural shift away from activities that create a lot of pollution.  In the initial stages of growth, economies tend to transition from the production of raw materials to agricultural products and then to manufacturing (all of which are relatively "dirty" endeavors). Once "developed", nations tend to outsource these activities to nations with lower wages (following the principle of comparative advantage) and focus production on services and high-tech activities which are relatively clean. We can look at growth in emissions, pollution or rates of deforestation to support these claims. Over the course of this semester, we've seen numerous examples of the association between high discount rates and overuse of natural resources.  

The above two lines of thought provide support for the Environmental Kuznets Curve (EKC) hypothesis, which suggests an inverted u-shape relationship between pollution (on the vertical axis) and aggregate income (on the horizontal axis).  Overall however, the evidence is mixed at best.  There is little doubt that richer countries use significantly more energy and have higher ecological footprints on a per capita basis than poorer countries.  Aside:  Here is a fun little quiz to measure your ecological footprint. Mine is pretty bad (144 basketball courts, yikes!), largely due to a lot of international travel, two cars and a fairly large house. 

Why does the relationship between income and the environment matter? What are some research questions that could be addressed on these topics? How might a better understanding of this relationship (at the household or national level) lead to better policy?


Marissa Murdock said...

The relation between income and the environment is particularly important when put in the context of sustainable development. Some criticise that the model pitches the environment vs the economy as both are mutually exclusive, i.e. economic growth occurs at the expense of the environment. Higher income is an indicator of higher GDP per capita and possibly a higher HDI. Therefore, it is important to see how changes in these two correlates with changes in environment quality to see how practical sustainable development really is.

Some research questions:

For some developed countries, the transition from agrarian-manufacturing-service industries is not as clear-cut or linear as implied. In many countries, service industries are very well developed (tourism etc.), however these industries need support from the agricultural industry and manufacturing industry. It should be far cheaper to maintain these industries inside national borders than to rely on developing countries. How would one account for these countries with mixed industrial activity when measuring changes in the level of pollution?

Additionally, some service industries also contribute to high levels of pollution. Service industries are energy intensive and rely heavily on fossil fuels. Is it that pollution levels have decreased or the pollution is just occurring in a different form (Carbon Dioxide Emissions)? Are matters such as climate change considered? I think these are interesting research questions as well.

Social, cultural and political orientation are factors which can also impact the relationship between a countries income level and pollution. It would be interesting to see how results differ across countries.


I think the link between income levels and environmental quality is an interesting correlation and a very pertinent one. In the Caribbean, we are still developing, However, at the national level, policies may be put in place to encourage 'green' behaviour from households with higher income levels, perhaps beyond a certain threshold. Incentive-based measures together with standards can be taken to ensure that those who can afford to use environmentally safe goods and services actually do so and that they engage greener behaviour.

Jason Walsh said...

Going back to Hardin's Tragedy of the Commons people rationally react to incentives and situations is which they are faced with. If the world is looked at through Hardin's eyes it seems that it makes sense that emerging markets or developing countries with their high discount rates are unable to wait to harvest sustainably because they are unfortunately not in a situation where they can invest in the future. Developed nations, though able to invest in the future in terms of natural resource extraction or resource management, are only willing to do so if they accrue the costs exclusively. This is seen clearly through the outsourcing of "dirty industries" due to local air and water pollution. While nations are working on being more green in that area, it seems that generally developed nations drive more and have larger carbon footprints for example I use 123 courts or 5.4 global hectares per year. I would generally consider myself to be relatively conservative and conscientious. That alone is pretty concerning. My, what I would consider "basic existing needs", are degrading the environment daily. I know this and I continue to live my life the same way more or less. Going back to Hardin I get all the benefit from driving my car to school but I share the negative with about 7 billion people.

It might be interesting to see if there are developing nations who never need to industrialize and ever develop large dirty industry. Through other assets like knowledge or development of strong investment knowledge or maybe regional tourism, I am thinking mostly in the Caribbean, maybe there is a situation where classic industrialization is not needed. The research question that I am trying to ask is if there are ways to develop rapidly without industrialization and exploitation of dirty industry?

In terms of policy it seems clear that, for right now, we need carbon trading to take off to help countries with large forests to get cash flows from conservation. It also seems that oil and coal prices need to be taxed at high levels in developed nations to internalize the negative externality. Perhaps if levels of pollution were taxed developed nations who are older and have high abatement costs would invest in developing nations to build clean industries with low abatement costs that without the help of the old firms the new firms would be dirty. That is more of a speculation I don't know how realistic that is or is not.

Ultimately it is interesting when considering the Kuznets curve because to me it seems that everyone is just responding rationally to the situation they are in. Through some sort of pigouvian tax or incentive we can attempt to realize the external costs, that are not shown in the market, within the industry and allow for a efficient outcome.

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