Economic Growth and Environmental Sustainability

The Prospects for Green Growth

Paul Ekins

• Publisher: Routledge
• Year: 2002
• ISBN:
  9781134689392
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

A key area of public policy in the last twenty years is the question of how, and how much, to protect vthe environment. At the heart of this has been the heated debate over the nature of the relationship between economic growth and environmental sustainability. Is environemental sustainability economic growth or `green growth', a contradiction in terms?
Avoiding the confusion that often surrounds these issues, Ekins provides rigorous expositions of the concept of sustainability, integrated environmental and economic accounting, the Environmental Kuznets Curve, the economics of climate change and environmental taxation. Individual chapters are organised as self-contained, state-of-the-art expositions of the core issues of environmental economics, with extensive cross-referencing from one chapter to another, in order to guide the student or policy-maker through these complex problems.
Paul Ekins breaks new ground in defining the conditions of compatibility between economic growth and environmental sustainability, and provides measures and criteria by which the environmental sustainability of economic growth, as it occurs in the real world, may be judged. It is argued that `green growth' is not only theoretically possible but economically achievable and the authors show what environmental and economic policies are required to achieve this.
Economic Growth and Environmental Sustainability will be welcolmed by students of and researchers in environmental economics and environmental studies, as well as all interested policy-makers.

1: Introduction

1.1 OUTLINE OF THE BOOK

This book is an investigation of the relationship between environmental sustainability, economic growth and human welfare, with an emphasis on the first two. This relationship is an important one. Certainly economic growth remains perhaps the prime objective of economic policy. Certainly too environmental sustainability has over the last ten years climbed high up the public agenda. Whether these two public objectives are in fact compatible or not is of critical concern. Indeed, for some economists, ‘the link between sustainable resource use and growth is, perhaps, the key economic question’ (Goldin and Winters 1995:2).

The link is also a much studied one. The literature on economic growth and the environment is huge, as the very partial bibliography for this book indicates. Yet the widest disagreement about the relationship remains. Common (1995:112ff.) notes a difference of opinion between (some) economists and (some) biologists on this issue. But there are just as significant disagreements between economists. Thus Goldin and Winters (1995:14) conclude that ‘economic growth and development are perfectly consistent with environmental protection’, while for Daly (1990:1), ‘sustainable growth is an oxymoron’.

Common (1995:45) asks the question ‘Which view is correct?’ and immediately answers it: ‘No-one really knows. Reasonable people may reasonably differ on the question.’

This book will arrive at a somewhat different conclusion. It will show that the views in question are both correct in that they are consistent with the assumptions on which they are based. This shifts the question to: what are their assumptions? and which assumptions are correct? The book identifies the assumptions and explores their theoretical and practical implications. It makes some assumptions of its own in order to arrive at an operational definition of sustainability. It identifies the conditions for economic growth to be compatible with environmental sustainability. It examines the evidence of the link between economic performance and different environmental impacts. It finds that actually the relationship between economic growth and environmental sustainability, in general and across different environmental dimensions, can be characterised in some detail, and broad conclusions that are useful for policy makers can be drawn.

The book proceeds from the hypothesis, evidence for which is presented later in this chapter, that environmental resources are not currently being used sustainably. This has resulted in political commitments to achieve sustainable development and a need to know what impacts, if any, moves towards sustainable development will have on economic growth.

Chapter 2 is an historical survey of previous approaches to the use and potential scarcity of environmental resources, from Malthus and the classical economists, through the evolution of environmental and resource economics, to the empirical work of Barnett and Morse, the ‘Limits to Growth’ debate and the emergence and dominance of the concept of sustainable development. From the environmental and resource economics literature it clearly emerges that economic optimality and unsustainability can be compatible. Sustainability therefore need not result from the pursuit of optimality. This suggests that, if sustainable development is the objective of environmental policy, sustainability will have to be explicitly pursued in its own terms.

In the third chapter a conceptual model is developed which identifies the contribution of the environment to the economic process, and that of both the environment and the economic process to human welfare. The model diagrammatically links a production function and a utility function in a way that is implicit in much of the literature but has not been explicitly described in this way before. It is intended that the model be a realistic description of the underlying phenomena, so that it purposely retains elements that are intractable to formal analysis and avoids simplifying assumptions, so that it is not developed mathematically. However, the model provides the underpinning conceptual basis for the chapters that follow. It is initially used to distinguish between different kinds of growth, failure to do which has resulted in much of the confusion in the literature. It is then used to relate these kinds of growth to the concepts of development and human welfare.

Chapter 4 both defines and elaborates on the concept of environmental sustainability as it relates to economic processes. It sets out a framework of analysis that defines the concept and makes it operational, by postulating a set of principles of environmental sustainability. Various ways of char-acterising the sustainable use of non-renewable resources are treated mathematically and compared, such that the characteristics relate to the distinction between weak and strong sustainability which is often drawn in the literature. Environmental sustainability emerges from the analysis in this chapter as an overarching concept within which environmental policy can be coherently and consistently organised.

Whether economic growth and environmental sustainability are compatible is then at least partly dependent on how economic growth is measured. Substantial efforts have now been invested in exploring how to adjust the national accounts for environmental impacts. Insofar as these adjustments are made, accounting for economic activity will better reflect the environmental contribution to it, and economic growth will be more closely related to a real increase in wealth creation. Chapter 5 explores how the national accounts might incorporate the environmental dimension, and suggests how the disagreement in the literature as to how defensive expenditures should be treated in the national accounts might be resolved. It further concludes that, although the concept of sustainable national income has played an important intellectual role in providing a rationale for adjusting the national accounts for environmental effects, it cannot be derived from simple subtractions from GNP, as has sometimes been proposed. However, this chapter derives a new indicator, here called the ‘sustainability gap’, which is a monetary indicator, based on current prices, of the gap between current and sustainable use of the environment.

Reconciling economic growth with environmental sustainability will require the reduction of the environmental impacts of current activity to sustainable levels and then their maintenance at these levels while incomes continue to grow. The technological change required to achieve this is explored through a numerical simulation using the Commoner-Ehrlich equation, I = PCT, which indicates a necessary reduction in T, the overall environmental impact per unit of consumption, of up to 90 per cent over fifty years if sustainability and income growth are to be attained. Various relationships between P, C and T are possible, which may make such a reduction more or less difficult. Reducing T without constraining growth in C can be achieved only through costless technical change or the correction of government or market failures. Evidence is presented which suggests that there are a surprisingly large number of opportunities for such change and such corrections.

Recent work has shown that, beyond a certain level of income, some aspects of environmental quality improve with further economic growth, a relationship that has been called an Environmental Kuznets Curve. It has been suggested that this may be a general characteristic of the growth/environment relationship. However, Chapter 7’s examination of the evidence leads to several rather different conclusions. First, the studies’ empirical results, taken as a whole, show a number of contradictions, and in some of the studies the underlying econometrics is weak. Second, the level of income in poor countries is such that, even if their environmental quality were to improve once the hypothesised incomes had been attained, the environmental damage caused in attaining this level would be very great, and much would be irreversible, with unpredictable but possibly very serious results. Third, with regard to high income countries, there is no evidence that their environment overall is improving. Indeed, an aggregate environmental dataset for these countries weakly suggests the contrary, while the datasets of the OECD and European Commission suggest this rather more strongly. The analysis in this chapter shows that the comforting hypothesis of an Environmental Kuznets Curve, which in its strongest version suggests that all that is required for growth-sustainability compatibility is the achievement of a certain income level, must be rejected.

Chapter 8 explores the hypothesis that a possible source of current inefficiency which may allow a win-win outcome for growth and the environment is the taxation system. The double dividend hypothesis suggests that shifting taxation onto the use of environmental resources from other factors of production may improve environmental quality and increase economic efficiency by reducing tax distortions. The chapter shows how this is theoretically plausible, though still controversial. Modelling suggests that any positive effects on output from a tax shift are likely to be small at best. The impact on employment could be more significant. However, the principal benefit of environmental taxation will be environmental improvement, and this should remain its primary objective.

The following two chapters apply the insights of the earlier work to two environmental problems of considerable policy concern, to see whether it is likely that environmental sustainability with regard to these problems can be achieved without constraining economic growth. Chapter 9 explores the issue of reducing carbon emissions in order to mitigate climate change. Much of the modelling literature suggests that the substantial reductions that are required for climate stability will incur substantial costs. However, expressing these costs as a reduction in the growth rate shows them actually to be rather small. In addition, the chapter identifies a number of reasons why they may also have been overestimated. When the secondary benefits of reducing carbon emissions are also taken into account, a significant reduction in carbon emissions appears possible at zero net cost. Beyond that, the cost of stabilising atmospheric concentrations of greenhouse gases depends largely on the development of non-carbon energy technologies.

The second case study in Chapter 10 looks at the UK emissions of sulphur dioxide and measures that have been taken to control them, most recently the limits of the Second Sulphur Protocol (SSP) and national limits on sulphur emissions from the power generation sector. The limits are explicitly based on the sustainability principle of the critical load. The possible evolution of sulphur emissions in the UK is analysed, and the costs estimated of applying the SSP and national constraints. Somewhat surprisingly, it emerges that the very substantial reductions in UK sulphur emissions mandated by these constraints are unlikely to be costly and will not have an appreciable macroeconomic effect.

Overall this book attempts to resolve the controversy that continues to permeate the issue of the growth-environment relationship. It maps out the conditions for compatibility for economic growth and environmental sustainability, refuting those who have declared sustainable economic growth to be an oxymoron. It also shows that such conditions have never yet been achieved by an industrial economy, and are stringently binding on future economic performance, refuting the proposition that environmental sustainability will be a more or less inevitable outcome from economic growth. The analysis and case studies suggest that sustainable economic growth is not only theoretically possible, but technologically feasible and economically achievable. But it requires determined, long-term policy commitment, and fundamental changes in consumer lifestyles and preferences. The major uncertainty is now whether the political commitment, and the willingness to embrace the necessary preference and lifestyle changes, will be forthcoming.

1.2 ENVIRONMENTAL UNSUSTAINABILITY

1.2.1 Unsustainability: some conclusions

In the twenty years 1972–92, between the UN Conference on the Environment in Stockholm and that on Environment and Development (UNCED) in Rio de Janeiro, scientific opinion gradually hardened that the damage being inflicted by human activities on the natural environment renders those activities unsustainable. It has become accepted that the activities cannot be projected to continue into the future either because they will have destroyed the environmental conditions necessary for that continuation, or because their environmental effects will cause massive, unacceptable damage to human health and disruption of human ways of life.

This is not the place for a detailed review of the evidence that has led to the scientific consensus, but the now perceived seriousness of the problem can be illustrated by a number of quotations of the conclusions of bodies which have conducted such a review. Thus the Business Council for Sustainable Development stated in its report to UNCED: ‘We cannot continue in our present methods of using energy, managing forests, farming, protecting plant and animal species, managing urban growth and producing industrial goods’ (Schmidheiny 1992:5). The Brundtland Report, which initiated the process which led to UNCED, had formulated its perception of unsustainability in terms of a threat to survival: ‘There are thresholds which cannot be crossed without endangering the basic integrity of the system. Today we are close to many of these thresholds; we must be ever mindful of the risk of endangering the survival of life on earth’ (WCED 1987:32–3).

The World Resources Institute (WRI), in collaboration with both the Development and Environment Programmes of the United Nations, concluded, on the basis of one of the world’s most extensive environmental databases, that: ‘The world is not now headed toward a sustainable future, but rather toward a variety of potential human and environmental disasters’ (WRI 1992:2). The World Bank, envisaging a 3.5 times increase in world economic output by 2030, acknowledged that: ‘If environmental pollution and degradation were to rise in step with such a rise in output, the result would be appalling environmental pollution and damage’ (World Bank 1992:9). The Fifth Action Programme of the European Community acknowledges that ‘many current forms of activity and development are not environmentally sustainable’ (CEC 1992a: 4), as indicated by ‘a slow but relentless deterioration of the environment of the Community, notwithstanding the measures taken over the last two decades’ (CEC 1992b: 3).

In its annual State of the World reports, the Worldwatch Institute has documented current environmental damage, concluding in 1993:

The environmentally destructive activities of recent decades are now showing up in reduced productivity of croplands, forests, grasslands and fisheries; in the mounting cleanup costs of toxic waste sites; in rising health care costs for cancer, birth defects, allergies, emphysema, asthma and other respiratory diseases; and in the spread of hunger.

(Brown et al. 1993:4–5)

These trends mean: ‘If we fail to convert our self-destructing economy into one that is environmentally sustainable, future generations will be overwhelmed by environmental degradation and social disintegration’ (ibid.: 21).

Little wonder, therefore, that in 1992 two of the world’s most prestigious scientific institutions saw fit to issue a joint statement of warning:

Unrestrained resource consumption for energy production and other uses…could lead to catastrophic outcomes for the global environment. Some of the environmental changes may produce irreversible damage to the earth’s capacity to sustain life…. The future of our planet is in the balance.

(RS and NAS 1992:2, 4)

1.2.2 Unsustainability: t...