Improving the Environment for a Greener Future
New Horizons in Environmental Economics series
Chapter 1: Economic Growth and the Environment
INTRODUCTION The debate over the role economic growth plays in determining environmental quality has been rapidly gaining importance (for example, Copeland and Taylor, 2004; Stern, 2004; Dasgupta et al., 2006). Three effects are key in determining the level of environmental pollution and resource use (see Grossman, 1995; Copeland and Taylor, 2004; Brock and Taylor, 2006). First, increases in output require more inputs and, as a byproduct, imply more emissions. Economic growth therefore exhibits a scale effect that has a negative impact on the environment. Second, economic growth also has positive or negative impacts on the environment through a technique effect. Changes in income or preferences may induce changes in policy that in turn lead to changes in production methods and hence emissions per unit of output.1 This suggests that the relationship between income and pollution should vary across pollutants because their perceived damage is different. Third, economic growth has positive or negative impacts on the environment through a composition effect. As income grows, the structure of the economy might change; consequently, there might be an increase in cleaner or dirtier activities. In the case of general industrial pollutants, environmental degradation tends to increase during the structural transformation of an economy from the agricultural to the industrial phase and subsequently starts to fall with the structural change from an energy- to a technology-intensive economy, based on services and knowledge. The net effect of these three factors generates the environmental Kuznets curve (EKC).2 Taking the three effects into account, this study...
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