Improving the Environment for a Greener Future
New Horizons in Environmental Economics series
Chapter 5: Environmental Productivity
INTRODUCTION The Environmental Kuznets Curve (EKC) hypothesis has generated a vast number of studies to examine the existence of an inverted U-shaped relationship between income and environmental degradation, and the literature is far from conclusive.1 Beyond a certain level of income, concern for environmental degradation becomes more relevant and a mechanism to reduce environmental degradation is put in place through necessary institutional, legal, and technological adjustments (for example, Grossman and Krueger, 1995). However, one of the major criticisms of these studies is that they have adopted a reduced-form approach to examine the relationship between per capita income and pollution emissions (see Stern, 1998 and Dinda, 2004, for detailed discussions on major problems of the EKC). These two variables are merely the outcomes of a production process, but they do not explain the underlying production process which converts inputs into outputs and pollutants. In fact, the transformation of this production process may lead to environmental improvement at higher income levels (Zaim and Taskin, 2000). Therefore, studies that examine the transformation of production processes by quantifying the opportunity cost of adopting alternative environmentally superior technologies are more relevant to understanding the process of pollution management and, therefore, to our study. Some of the current income differences among countries are the outcome of what happened to total factor productivity (TFP) subsequent to the beginning of modern economic growth (Prescott, 1998). Similarly, differences in TFP have important implications for environmental quality (Chimeli and Braden, 2005). Therefore, it is important to understand TFP with regard...
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