EKC Analysis For Resource Use

February 2009
Alejo Etchart

ANALYSIS OF THE EKC. CONSEQUENCES FOR RESOURCE USE

1- Executive summary

The Environmental Kuznets Curve (EKC) hypothesis cannot be accepted as a general
rule either for the Spanish case or for other developed or developing countries.
Economic growth alone, far from being the solution to environmental problems, is
causing an increase in resource use and pollution. The consequences of inaction can be
dramatic. Solutions to curve this threatening path are available, but they need to be
urgently implemented.

2- Introduction

This document analyses the article ‘Income growth and atmospheric pollution in Spain:
An input-output approach’ (Roca and Serrano, 2006) (“the article”, from now on). The
objective of the article is to study the relationship between economic growth in Spain
and nine atmospheric pollutant gases:
- The six GHG: CO2, CH4, N2O and the synthetic gases –HFCs, PFCs, SF6
- Three gases associated with local environmental problems: SO2, NOx, NH3

After an introduction to the EKC, the article’s evaluation about its existence in Spain is
analysed firstly from a fundamental approach, and then from a methodological one.
Criticisms of the EKC hypothesis from other relevant authors are then presented. The
conclusions presented in the document include the implications of the findings for the
resource use policies.

3- The EKC hypothesis

3.1. The hypothesis and its importance

The EKC hypothesis emerged as an extension of the Kuznets curve. This curve showed
that economic inequality increases over time while a country is developing, then after a
critical average income is attained, begins to decrease (Kuznets, 1955). The EKC
hypothesis was set by Grossman and Krueger (1991), and gained popularization through
the World Bank Development Report (IBRD, 1992). Figure 1 summarises the EKC
hypothesis.

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Figure1- The EKC (Source: Indian Institute of Technology)

As the article says, the EKC hypothesis not only maintains that economic growth and
reduction in environmental pressures can coexist, but also affirms that per capita income
growth is the main determinant of this reduction.

Policy makers have shown great interest in the perspective of the EKC hypothesis. Stern
(2004, p.1419) thinks that the possibility of achieving sustainability without a
significant deviation from “business as usual” was an obviously enticing prospect for
many. Already by the mid-seventies, Barbier (1977) stated that the crucial policy
question for policy makers was whether economic growth should remain the main
priority, taking the environmental protection as a secondary consideration to be
addressed mainly in the future, or if this protection should be urgently tackled.

The World Bank has long maintained that economic growth is good for both people and
the environment, contributing to the alleviation of poverty and to the clean up of the
environment (Tamazian et al., 2009). Beckerman (1992) recommended economic
growth as the most effective cure to environmental ills.

4- Appraisal to EKC by the article

4.1- Fundamental appraisal

The article denies the existence of any of the three possible logical reasons that could
explain the EKC:

4.1.1- Technological changes

If the EKC hypothesis was proved to be true, then higher per capita incomes would
carry technological changes that would generate less environmental pressure. The
article opposes that:
- Even if a higher efficiency in resource use could be assumed to follow the economic
growth, a rebound effect can take place. This rebound effect consists on a stimulation of

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the demand caused by the efficiency increase in the use of a resource. This effect would
reduce or cancel the mitigating effect of the increased efficiency. In effect, the Spanish
Doctor of Economics Carpintero (2003, p.19) reflected that while worldwide energy
efficiency improved a 2% between 1973 and 1990, the energy consumption kept
growing 0.7% annually, through the increase of demand due to the price cuts that the
energy costs saving involved.
- Technological changes are often linked to the development of new processes and
products that might represent a high environmental threat.

4.1.2- Final demand structure

If the EKC hypothesis was proved to be true, then higher per capita incomes would
carry a higher share in demand by the service sector at the expense of the industrial
sector. However, some service activities, such as air transport, may generate as much
pollution, or more, than industries. Further, it could be said that the environmental
pressure declines as income increases, but only per unit of income, not in absolute
terms.

4.1.3- Individual preferences

An EKC would demand that, once certain income level is achieved, consumers would
decide to consume higher environmental quality goods and services. The authors argue
that environmental quality is not a good that can be purchased in the market, but
something that must be resolved in the political sphere. Van der Bergh (2008) states that
the current set of market prices does not reflect the external costs, so these prices are
unreliable signals of the environmental cost of goods and services.

4.2- Empirical analysis appraisal

The article develops an input-output analysis to examine the existence of an EKC in
Spain, applied to two complementary approaches:

- Structural decomposition analysis SDA, or longitudinal perspective.
Its purpose is to break down the variation of emissions into three effects: volume, final
demand structure and technological change. Its scope is limited by the short period for
which relevant data are available: 1995-2000. Nevertheless, the conclusions appear to
be categorical. The EKC is only compatible with the technological change effect, but it
is far from compensating the global increase of emissions, mainly due to the volume
effect. Only for SO2, a gas with local and short-term effect and relatively low costs of
mitigation, does the decrease caused by the technological effect overwhelm the increase
caused by the volume effect. This situation has however been forced by compulsory
objectives established by the EU rather than by the per capita income improvement.

- Household consumption pattern analysis, or cross-sectional perspective.
The cross-sectional perspective investigates if emissions caused by wealthier families
are higher than those caused by lowest income ones. The result of the cross sectional
approach is also limited because the analysis is made on the expenditure instead of on
the incomes, while no proof is given that the first is a good estimator of the second. The
cross-sectional analysis shows that for all the pollutants, emissions increase
monotonically with household expenditure, even though, in general, the amount of

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pollution per unit of expenditure decreased with expenditure level (except for the three
synthetic gases).

The authors conclude that no evidence can be found of a decrease in emissions
associated with per capita income growth. On the contrary, for the major amount of
pollution (derived from CO2) the emissions grow in almost the same proportion as the
per capita incomes.

5- Alternative appraisals to the EKC

5.1- Appraisal based on the Ecological Footprint (EF)

Caviglia-Harris et al. (2007) test the validity of the EKC using the EF instead of what
they consider “narrow measures of pollution” as proxies for environmental quality.
They synthesize a number of studies that compare the effects of economic development
with different components of the global EF. They find (Table 1) that the world EF
increased with economic growth in rich and middle-income nations, while in poor ones
there was an insignificant decrease.

Table 1- Evolution of Ecologic Footprint and incomes.

Much of the general increase is attributed to energy use (i.e. CO2). Only when the
energy components of the EF are removed, does a significant EKC appear. The energy
use component must be discounted by a full 50% before a traditional EKC is found
(p.1154). Therefore, they conclude that economic growth alone will not lead to
sustainable development.

5.2- Other critics to EKC hypothesis

Furthermore, Caviglia-Harris et al. (ibid, p.1150) find that, when the emission of
pollutants is used as the variable in other studies, the EKC can only be found for a
limited subset of pollutants. They also find (ibid) that the results are often sensitive to
the nations (or states) chosen, the pollutant measurement (emissions versus ambient
concentrations) and the trade effects, so that the EKC cannot be generalized. Müller-
Fürstenberger and Wagner (2007, p.655), find serious methodological shortcomings in
the econometric analysis of most of the empirical studies that support the EKC
hypothesis. Perman and Stern (2003, p.325) prove that when appropriate data and
techniques are used, the EKC does not exist. Wagner (2008, p.388) argues that the

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evidence of an EKC found with commonly used methods is entirely spurious and
vanishes when resorting to correct procedures.

Stern (2003, p.517) finds a logic for the appearance of EKCs. He thinks that time
related effects tend to reduce environmental impacts in countries at all levels of income.
In rapidly growing middle income countries, the scale effect, which increases pollution
and other degradation, overwhelms the time effect. In wealthy countries, growth is
slower, and pollution reduction efforts can overcome the scale effect. He thinks that this
is the origin of the apparent EKC effect.

Roca (2001, p.85) states that no evidence exits of a ‘de-linking’ between economic
growth and environmental degradation. The studies that support the EKC generally find
inversion points that are a very long way from current income in the developing
countries. Roca indicates that much higher levels of environmental degradation will be
reached unless ambitious environmental policies are followed.

6. Conclusions and implications for resource use

Much of the damage caused on environment by the economic growth, such as loss of
wilderness and species extinction, may be irreversible. The IPCC (2007) can hardly be
clearer:
- Human action has likely been determinant to the world’s physical and biological
systems (ibid, p.19).
- Altered frequencies and intensities of extreme weather, together with sea level rise, are
expected to have mostly adverse effects on natural and human systems (ibid, p.52).

Environmental problems are strongly linked to resource use, as was already stated by
the Brundtland Report. This warning was made one paragraph before saying that the
economy was crossing the threshold that endangers the survival of life on Earth
(WECD, 1987, chapter 1).

The OECD (2008) thinks that the necessary policies and solutions are available,
achievable and affordable, but action is needed now, while it is relatively inexpensive,
particularly in the rapidly emerging economies (p.3). They stress the need to ensure
efficient resource use and eco-innovation within sound environmental and institutional
frameworks. In their absence, globalisation will intensify environmental pressures. Eco-
innovation and eco-efficient techniques not only reduce these pressures, but can also
raise economic productivity, making businesses more competitive (p.29).

The highest obstacle to change that the OECD sees is the underpricing of natural
resources and pollution. If prices reflected the environmental costs, therefore making
the polluting activities more expensive, they would become clear incentives for
increased resource and energy efficiency. Unfortunately, in most countries, the use of
scarce natural resources remains under-priced and even subsidised, and the polluter-
pays principle is rarely implemented fully (p.33).

Therefore, they recommend making the prices internalise the cost of resource use
(p.251) by settling market-based policies -such as taxes, tradable permits and the
removal of harmful subsidies- as the most powerful in order to send signals to business
and households to make their production and consumption more sustainable (p.34).

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With regard to wastes (p.237), the continuous growth in the global demand for materials
and the amounts of waste disposed of, means that conventional waste policies alone are
not enough. Stronger policies emphasising material efficiency, redesign and reuse of
products, waste prevention, recycling of end-of-life materials and products and
environmentally sound management of residues- are needed to counterbalance the
environmental impacts of waste throughout the entire life-cycle of materials.
.

REFERENCES
- Barbier, E. (1997) “Rural poverty and natural resource degradation”. In: López, R.,
Valdés, A. (Eds.), Rural Poverty in Latin America. The World Bank, Washington.
- Beckerman, W. (1992) “Economic growth and the environment: whose growth?
Whose environment?” World Development 20, 481–496.
- Carpintero, O. (2003), “Pautas de consumo, desmaterialización y nueva economía”,
available from http://www2.cccb.org/transcrip/urbanitats/necessitat/carpintero.pdf
[Accessed 31/01/09]
- Caviglia-Harris et al (2007), “Taking the “U” out of Kuznets: A comprehensive
analysis of the EKC and environmental degradation”, Ecological Economics, 68 (4),
1149-1159
- De Bruyn (1997), “Explaining the environmental Kuznets curve: structural change and
international agreements in reducing sulphur emissions”. Environment and
Development Economics 2, 485–503, in Roca, J. and Serrano, M. (2006)
- Grossman, G. M. and Krueger, A. B. (1991), “Environmental Impacts of a North
American Free Trade Agreement”. National Bureau of Economic Research. Working
Paper 3914. Cambridge MA: NBER
- Indian Institute of Technology Bombay, Dept of Computer Science and Engineering
(n.d.), available from
http://www.cse.iitb.ac.in/~laxman/hss606/slide/02_ENVIRONMENTAL%20KUZNET
S%20CURVE1_group2.ppt [Accessed 15/02/09]
- IBRD (1992) “World Development Report 1992: Development and the Environment”.
New York: Oxford University Press
- Kuznets, S. (1955) Economic growth and income inequality. American Economic
Review 49, 1–28.
- Müller-Fürstenberger, G. and Wagner, M. (2007), “Exploring the environmental
Kuznets hypothesis: theoretical and econometric problems”, Ecological Economics 62
(3–4) (2007), 648–660
- OECD (2008), “Environmental Outlook to 2030”, Paris: OECD Publishing.
- Perman R. and Stern D.I (2003), “Evidence from panel unit root and cointegration
tests that the Environmental Kuznets Curve does not exist”, Australian Journal of
Agricultural and Resource Economics 47 (3), 325–347
- Roca (2001), “Economic growth and atmospheric pollution in Spain- discussing the
environmental Kuznets curve hypothesis”, Ecological Economics 39, 85-99.
- Roca, J. and Serrano, M. (2006) “Income growth and atmospheric pollution in Spain:
An input-output approach”Ecological economics 63, 230-242
- Stern, D.I. (1998), “Progress on the EKC?”, Environment and Development
Economics 3 (2), 173–196.
- Stern, D.I. (2003), “Environmental Kuznets Curve”, Encyclopedia of Energy, 517-525

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- Stern, D.I. (2004), “The rise and fall of the Environmental Kuznets Curve”, World
Development 32 (8), 1419–1439
- Tamazian et al. (2009). “Does higher economic and financial development lead to
environmental degradation: Evidence from BRIC countries”. Energy Policy 37, 246–
253.
- Van den Bergh, J. (2008). “The GDP paradox”. Journal of Economic Psychology
Volume n.d. p.1-19
- Wagner, M. (2008), “The carbon Kuznets curve: A cloudy picture emitted by bad
econometrics?” Resource and Energy Economics 30 (3), 388-408
- WCED- World Commission on Environment and Development (1987) “Our Common
Future”(The Brundtland Report) London: Oxford University Press, 1987

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