The Environmental Kuznets Curve, pt. 1

One of the first theories that I have encountered in environmental economics is the Environmental Kuznets Curve. In this and the next post, I would like to summarise my understanding and thoughts of it so far. 


In the 50s, economist Simon Kuznets proposed a hypothesis that as per capita income increases, income inequality also rises at first, but starts falling after a certain turning point. This relationship can be represented by an inverted U-shaped curve, known as the Kuznets Curve. In the 90s, the Kuznets Curve found new application in the environmental studies, when several studies provided evidence that environmental quality, as measured by the concentration of some pollutants, deteriorates initially at low levels of per capita income and then improves at higher levels (see Fig. 1). Because of its resemblance to the original Kuznets Curve, this relationship was given the name the Environmental Kuznets Curve (EKC) (Yandle, Vijayaraghavan andBhattarai, 2002).

Fig. 1: Environmental Kuznets Curve. (Source: Yandle, Vijayaraghavan and Bhattarai, 2002)

 Since then, the EKC has become a common feature in the literature of environmental policy. While the empirical branch of the literature has sought for similar patterns for additional indicators of environmental quality, theoretical research has proposed a number of theoretical explanations for an inverse U-shaped pollution-income relationship, with focus on the descending branch of the curve.

 First, as economic development progresses, structural changes take place where pollution-intensive industries are replaced by information-intensive industries and services. Structural changes of advanced economies are accompanied by the export of pollution-intensive industries to less-developed economies, where environmental regulation is less stringent, known as the pollution haven hypothesis. This also suggests the influence of trade on the distribution of pollution. (Alstine and Neumayer, 2010). Here lies a major criticism of the EKC, as the least-developed countries would have nowhere to outsource their pollution, meaning that the EKC is not indefinitely replicable (Andreoni and Levinson, 2001).

 A second theory is based on the idea of income elasticity. At low levels of income, the income elasticity of demand is high for sustenance and low for environmental amenities. As income rises, the income elasticity of demand for environmental quality also increases. At certain threshold, it becomes greater than 1 and environmental quality is a luxury good. Yandle, Vijayaraghavan and Bhattarai (2002) argue that this market phenomenon stems from fundamental changes in institutions. For instance, “the movement along an EKC is also a movement through a well-known set of property rights stations”, i.e. the environment shifts from a commons to a private property, which gives people more incentives to manage and conserve it. 


At this point, it is worth mentioning another criticism regarding the universality of the EKC. It has been found to be applicable to only certain types of pollutants such as SO2 and nitrogen oxides which cause mostly localised environmental problems. Conversely, in the case of CO2, “the evidence is at best mixed”(Galeotti, Lanza and Pauli, 2005), as it is a global pollutant that involves cross-border externalities. No country has sufficient incentive to internalise these externalities, creating a not-in-my-backyard situation (Levinson, 2002). This again highlights the need for more advanced institutions that facilitates multilateral cooperation, for example the Paris Agreement. 


In conclusion, I believe it is vitally important to note that the EKC does not suggest that developing countries should just follow the old path of “grow (pollute) first and clean up afterwards”(as it might appear at first glance). But quite on the contrary, the aforementioned theories and criticisms surrounding this hypothesis suggest that economic growth alone does not solve environmental problems. Improvement of the environment relies on good policies and institutions which have the potential to help flattening the curve and achieving an earlier turning point.

“Smog Economics”- How Much Does It Cost to Clean up China’s Air?

On high pollution days, a question that often makes me scratch my head is whether I should go out for lunch or have it delivered. If I go out (to nearby places by foot), I’d breathe in the hazardous air. (Many places are now equipped with air purifiers, which can more or less reduce the pollution indoors.) If I order a takeout, it usually comes with excessive packaging. Also, the courier service would emit extra pollutants, which could have been avoided, if everyone would give up on takeout food. Even an ordinary person ponders over the choice of personal health and that of environmental protection, it is little wonder that policymakers seem rather hesitant to act. Probably the most crucial question that they ask themselves and their think tanks is how much it will cost to clean up China’s air.

I’ve derived the title of this post from the term environmental economics. The impacts of smog on China’s economy are far more profound than the booming markets of masks and air purifiers. In fact, they manifest themselves in resource prices, industrial economics and macroeconomic statistics. For policymakers and economist, there is no getting around it.

Economist Fang Sihai revealed in 2013 that he considered environmental governance, as represented by air pollution control, as the second most important variable when forecasting the short-term trend of China’s economy. He predicted a 0.5% slowdown of economic growth for 2014. The real GDP growth in 2014 was 7.4%, 0.3% lower than that of the previous year. Most affected by environmental governance are those energy-，pollution- and emission-intensive industries.

Also in 2013, Wang Jinan, deputy director and chief engineer at the Chinese Academy for Environmental Planning (CAEP) of the time, estimated that the Action Plan on Prevention and Control of Air Pollution (mentioned in a previous post, hereafter referred to as the Action Plan) would restrain the growth of the steel, cement and coke industries, causing 81.2, 16.7 and 14.2 billion RMB loss respectively. Eliminating backward productivity would cause a total GDP loss of 114.8 billion RMB as well as the loss of 140 thousand jobs. According to a more recent study (published in 2015) made by CAEP and the Clean Air Alliance of China, eliminating backward productivity would cause a total GDP loss of 776.3 billion RMB and the loss of 892 thousand jobs in the five-year implementation period (2013-2017).

Redistribution of resources promotes the adjustment and upgrading of the industrial structure. By contrast to the traditional energy-，pollution- and emission-intensive industries, agriculture, forestry, the transportation equipment manufacturing industry etc. could benefit from the environmental governance and become new growth points. Also according to the 2015 study, the Action Plan would drive GDP growth of 2.04 trillion RMB and increase 2911 jobs. The direct investment required was estimated to be 1.84 trillion RMB, thus resulting in an input-output ratio of 1:1.11-a close tie.

It is worth noting that air pollution control would also lead to considerable health benefits, which were not included in this calculation. And even if the input were higher than the output, would it be legitimate to take no action at all? Here lies my concern about environmental economics in general: environmental problems are often characterised by their longevity, complexity and comprehensiveness. How do we monetise such things that we do not fully understand? I understand that efforts must be made, but it should not become our only criteria when making a decision.

Economist Zuo Xiaolei opposes the view that air pollution control slows down the economic growth. Rather, she believes that its essence is the removal of bubbles from China’s economy. Another economist Liu Shengjun also pointed out that air pollution has merely made the environmental costs of economic growth explicit and “equalised” (ie. borne by the entire society). The following question, naturally, would be whether the expenses of air pollution control should also be splitted by citizens. It is then a question of legitimacy. 

Greetings from Beijing

Dear readers,

To make a long story short, I’m back in the blogging business XD

How time flies-it’s been more than 10 months since I wrote the last post. During this time, I completed my Master’s programme at UCL and moved to Beijing. I am now doing a part-time job and another internship in an environmental NGO, whilst looking for other opportunities. 

I had been studying abroad for the past four years and was only back during summer vacations. Air pollution was something that I constantly read or heard about, but not something that I actually experienced. I mean before 2012, I was-like most Chinese-unaware of the issue. Therefore, in these last two months in Beijing, it still frequently strikes me how bad the situation is. 

For a glimpse-central heating in Beijing started last Saturday. On Wednesday, the government issued an orange alert (the second highest in a four-tier ranking system) for heavy air pollution over three consecutive days and advised residents to limit outdoor activities. This is a picture I took near my work place on Friday and the real-time air quality data from the nearest monitoring station:

Not only am I now breathing the reality, I also get to be more exposed to the more practical aspects of the problem through my internship, as one of the main campaigns that the NGO for which I’m working is to reduce sources of air pollution in China, by lobbying for China to move from coal to renewable energy. Therefore, I would like to continue using this blog to record what I see and hear, and hopefully, as I progress, what I think.