By Bruce Yandle, Maya Vijayaraghavan,
and Madhusudan Bhattarai
Since 1991, when economists first reported a systematic relationship between income changes and environmental quality, this relationship, known as the Environmental Kuznets Curve (EKC), has become standard fare in technical conversations about environmental policy (Grossman and Krueger 1991). When first unveiled, EKCs revealed a surprising outcome: Some important indicators of environmental quality such as the levels of sulfur dioxide and particulates in the air actually improved as incomes and levels of consumption went up.
Prior to the advent of EKCs, many well-informed people believed that richer economies damaged and even destroyed their natural resource endowments at a faster pace than poorer ones. They thought that environmental quality could only be achieved by escaping the clutches of industrialization and the desire for higher incomes. The EKC's paradoxical relationship cast doubt on this assumption.
We now know far more about the linkages between an economy and its environment than we did before 1991. This primer shares this knowledge.
There is no single EKC relationship that fits all pollutants for all places and times. There are families of relationships, and in many cases the inverted-U Environmental Kuznets Curve is the best way to approximate the link between environmental change and income growth. The indicators for which the EKC relationship seems most plausible are local air pollutants such as oxides of nitrogen, sulfur dioxide, and particulate matter.
The EKC evidence for water pollution is mixed, but there may be an inverted U-shaped curve for biological oxygen demand (BOD), chemical oxygen demand (COD), nitrates, and some heavy metals (arsenic and cadmium). In most cases, the income threshold for improving water quality is much lower than the air pollution improvement threshold.
The acceptance of the EKC hypothesis for select pollutants has important policy implications. It implies that some environmental degradation along a country's development path is inevitable, especially during the take-off process of industrialization. Second, it suggests that when a certain level of per capita income is reached, economic growth helps to undo the damage done in earlier years. If economic growth is good for the environment, policies that stimulate growth (trade liberalization, economic restructuring, and price reform) should be good for the environment.
However, income growth without institutional reform is not likely to be enough. Improvement of the environment with income growth is not automatic but depends on policies and institutions. GDP growth creates the conditions for environmental improvement by raising the demand for improved environmental quality and makes the resources available for supplying it. Whether environmental quality improvements materialize or not, when, and how, depend critically on government policies, social institutions, and the completeness and functioning of markets.
Better policies, such as the removal of distorting subsidies, the introduction of more secure property rights over resources, and the imposition of pollution taxes to connect actions taken to prices paid will flatten the underlying EKC and perhaps achieve an earlier turning point. The effects of market-based policies on environmental quality are expected to be unambiguously positive.
Bruce Yandle is a PERC Senior Associate and Professor of Economics Emeritus at Clemson University. He has served as chairman of the South Carolina State Board of Economic Advisors, senior economist on the President's Council on Wage and Price Stability, and executive director of the Federal Trade Commission. Yandle is author or editor of fourteen books, including Environmental Use and the Market, The Political Limits of Environmental Regulation, Regulatory Reform in the Reagan Era, Taking the Environment Seriously, Land Rights: The 1990s' Property Rights Rebellion, Common Sense and Common Law for the Environment, and The Market Meets the Environment. Yandle received his A.B. degree in economics from Mercer University and his master's and Ph.D. degrees from Georgia State University.
Maya Vijayaraghavan is an economist and Steven M. Teutsch Fellow in the Office on Smoking and Health of the Centers for Disease Control and Prevention in Atlanta, Georgia. She served as a consultant to the Middle East and North Africa Region of the World Bank Group in Washington D.C. Vijayaraghavan received her B.S. degree in botany from Stella Maris College, India, an M.S. in environmental toxicology from the University of Madras, India, and a Ph.D. in applied economics from Clemson University. Her research on this project was undertaken while she was a research associate with Clemson University's Center for International Trade.
Madhusudan Bhattarai is a postdoctoral economist with the International Water Management Institute in Colombo, Sri Lanka. At present, he is studying irrigation impacts in Asia and interbasin and intersectoral water transfers and conducting a global-level analysis to establish a relationship between irrigation development and societal development level (an Environment Kuznets Curve for irrigation). Bhattarai was a research scholar and a collaborator consultant at the International Rice Research Institute in the Philippines. His bachelor's degree in agricultural science is from Andhra Pradesh Agricultural University, India, and his Ph.D. is from Clemson University.
PERC Research Studies, written by PERC fellows, associates, and colleagues, are designed to give scholars and policy analysts background for understanding today's environmental policy issues. These studies illustrate PERC's ongoing commitment to high-quality, policy-relevant research. PERC's Research Studies are edited by Jane S. Shaw and produced by Dianna Rienhart.
China and the Environmental Kuznets Curve