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Unformatted text preview: NATIONAL AND INTERNATIONAL TRADE AND THE ENVIRONMENT I The Environmental Kuznets Curve Hypothesis How do emissions vary as countries develop? The world contains a number of fast developing countries which are also big polluters, such as China. Will these countries pollute more or less as their economies grow? Definition 25 The ENVIRONMENTAL KUZNETS CURVE HYPOTHESIS (EKC) states that pollution initially rises and then falls as a country develops. If the EKC holds, we might be tempted to make an even stronger statement: growth- promoting policies in less developed countries (LDCs) cause incomes to rise and are thus environmentally friendly. We do not need to bother negotiating with developing countries to reduce emissions. Let LDCs develop, and they will eventually solve their own environmental problems, even if in the short run pollution rises. This idea has been embraced by the World Bank and IMF. Under this idea, trade agreements are also environmentally friendly even if the LDC has lax pollution regulations. However, the EKC is controversial. It is not clear either in theory or the data that pollution eventually decreases with income, or what the TURNING POINT (the level of income after which pollution falls) is. A Three effects We will trace out three effects of income on the environment: 1. Technique effect. 2. Scale effect. 3. Composition effect. 1 Technique effect As income grows, a country may use more pollution efficient production processes. Definition 26 TECHNIQUE EFFECT. As incomes rise, firms use more pollution efficient production processes, reducing pollution. 78 EMISSIONS INTENSITY or pollution per unit of output falls as income rises. The technique effect is what the EKC proponents are describing. If environmental quality is a normal good, then people should desire more environmental quality as their incomes rise, all other things equal. These preferences must somehow be translated into a government policy for more stringent regulation. Assuming in a democracy that the preferences of the people are (imperfectly) translated into government policy, we should see regulation become more stringent as incomes rises. Then environmental compliance spending should rise, and emissions intensity should fall. The process is thus: 1. Incomes rise, increasing preferences for environmental quality, assuming environmental quality is a normal good. 2. Preferences result in more stringent environmental policy. 3. Firms respond to the regulation by undertaking costly reductions in emissions per unit of output. 4. Emissions per unit of output falls, and compliance spending rises. 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 10 20 30 40 50 60 70 80 year intensity United States Emissions Intensity PM x SO 2 NO x + CO VOC units for PM and NO x are tons per million $, units for SO 2 and VOC are tons per 200K $ Figure 51: Air pollution emissions intensity (emissions per unit of GNP)....
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This note was uploaded on 01/08/2012 for the course ECO 345 taught by Professor Kelly during the Fall '11 term at University of Miami.

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