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For most of mankind's history, we seem to have been engaged in a race between economic development and natural degradation. This poses a dilemma for us: what is greater, our responsibility to raise the present generations out of poverty by striving for development, or our responsibility to the future generations by striving to leave behind a natural environment as pristine as possible? Listening to the two sides of the passionate green vs. development debate, one can be forgiven for thinking they are talking about two different planets. The optimists, their ranks swelled by economists, scientists and technophiles, point out that fish have returned to the Thames estuary —which had been officially declared dead in 1957—, that the terrestrial ecosystems have become a net sink of greenhouse-gas carbon dioxide in the past half-century thanks to the increasing forest cover in the rich world, and that air quality is now far better than say, fifty years ago. Just keep on that track and we are saved. The pessimists, a motley group of ecologists, environmentalists, NGO lobbyists, anti-globalisation preachers and not a few anti-capitalists, shout back that we've just about reached the point of no return to a planetwide ecological disaster. Just keep on that track and we are doomed. Governments nearly everywhere, given their need of getting both the greens' and the pro-development camp's votes, must tread a fine line when setting policy. Luckily for them, CESifo Research Network economist Apostolis Philippopoulos and his aptly named colleague George Economides, both of Athens University of Economics & Business, attempt to reconcile the two seemingly divergent goals using non-partisan, rigorous economic tools. They have just released their findings in a CESifo Working Paper. While Economides and Philippopoulos ask whether green governments should prioritise environmental policies over growth-enhancing ones, their insights apply to a much broader political spectrum of policy-makers. At first blush, their main finding appears counter-intuitive: the more the citizens care about the environment, the more growth-enhancing policies the government finds it optimal to choose in the long run. So, it looks like a case of having the cake and eating it too. Too good to be true? Let's see. The authors start by posing the question of whether there is a trade-off between economic growth and environmental quality. To examine the question more closely, they consider a closed economy populated by private agents (households and firms) and a government. Households purchase goods, work and save, and get utility from private consumption and the available natural resources, which are considered a public good. Firms produce output by using private inputs (capital and labour) and public infrastructure, polluting the environment in the process. The government imposes taxes on the polluting firms' output, and then uses the resulting tax revenue to finance public infrastructure —which basically favours the firm— and to clean up the environment, something that basically favours the household. The authors go on with the application of all these basic concepts to a fairly complex dynamic model. There are two basic ways not to damage the environment: either you abandon economic growth —a proposition which the real world does not necessarily sustain— or you grow in a way that is sustainable in the long run. The latter is clearly the more desirable of these two possibilities. But how to go about it? After analysing the corresponding long-run properties and transitional dynamics, the authors conclude that the best way is to pursue growth-stimulating policies. While the environment is degraded by economic activity, it can also be maintained and restored by environmental policy. But the latter requires government revenue, large tax bases, and hence economic growth and prosperity. The above is well reflected by the so-called "environmental Kuznets curve," which maintains that there exists an inverted-U-shaped relationship between income and environmental degradation. In other words, early on in the path to development a varying but significant degree of environmental deterioration seems unavoidable, but after reaching a certain threshold, both economic affluence and environmental improvement start to walk hand in hand, to the benefit of all. This is corroborated by empirical evidence across countries, which shows a strong positive correlation between per-capita income and greenery. Furthermore, anecdotal evidence suggests that environmental awareness kicks in among the citizenry once their basic needs have been sufficiently well taken care of. They may even feel inclined to finance environmental restoration far from their own borders. Companies, in turn, prodded by the new green credentials of their customers, tend to develop more eco-friendly instincts. The authors acknowledge that the range of environmental policy instruments they examined focus mainly on taxes on polluting activities and on cleanup policy financed by the collected tax revenues. Other instruments such as cap-and-trade —see next article— and those encouraging private investment in innovative environmentally friendly technologies are to be the subject of future research. Still, the right path seems clear enough: by choosing growth-enhancing
policies without taking the eyes off the environmental ball, we can make
sure that the ravaging of multiple planets that kept Gandhi awake at night
won't be necessary after all.
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Note: This text is the responsibility of the writer and does not necessarily reflect the opinion of either the CESifo Working Paper author(s) cited or the CESifo Group Munich. Copyright © CESifo GmbH 2005. All rights reserved. |
The ideal world for someone with a green cast of mind is a bucolic wilderness
covered in forest, crisscrossed by unsullied streams and inhabited by
all kinds of blissful creatures. The one creature missing is… well,
us.