Chapter 5: Rethinking the Environmental Kuznets Curve
(with Mariano Torras) INTRODUCTION Mounting public concern over environmental issues has sparked efforts to understand more clearly the reasons for variations in the extent of environmental degradation. One way to address this question is through international comparisons, in which the dependent variable is some measure of environmental quality, and an array of variables that theory suggests might affect this measure – directly or otherwise – is included on the right-hand side of the regression equation. The studies (for example, Selden and Song 1994; Shaﬁk 1994; Grossman and Krueger 1995) that have attempted this have used per capita income as the chief explanatory variable of interest. The relationship between per capita income and environmental quality depends on scale, composition, and technology effects.1 If the pollution intensity of aggregate output were fairly constant across countries, we would expect environmental quality to worsen with income, as greater output generates more pollution (the scale effect). On the other hand, environmental quality could improve with income if this scale effect were eclipsed by the combination of the two other effects. With increasing per capita income, the composition of output shifts among sectors that differ in their pollution intensity of output. For instance, the service sector may grow relative to the manufacturing sector. This composition effect can alter the pollution intensity of output. Furthermore, the various sectors of the economy may adopt less-polluting technologies, either because of market-driven technological advance (spurred in part by the internal beneﬁts of resource conservation) or government regulation (including standards, taxes,...
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