• Neel Joshi

The Environmental Kuznets Curve: Justifying Unsustainable Economic Growth

As early as the 18th Century there existed a saying in England, ‘Where there is muck, there is merry’.The saying essentially conveys that where there’s resource degradation, there’s also economic prosperity. Although it might help to remember that the Industrial Revolution was around the corner. As data from the early 19th Century suggests, carbon emissions exponentially shot up during this course of time.

The saying used to go the other way around too - where there is economic prosperity, there is environmental degradation. It was thought that environmental degradation is a necessity when it comes to economic prosperity which brings us to the question - are these two co-dependent? Do you think someone better off monetarily will necessarily care about the environment?

The thought later proved to be fallacious since it assumed a digressive relationship between economic growth and environmental degradation (in simple words, initially emissions will rise exponentially, to eventually flatten out on a positive asymptote line). This line of thinking suggested that after a point of time, increase in emissions will stagnate whilst incomes will keep rising. More importantly, it allowed lawmakers to ignore the environment for the time-being since it was thought that only once citizens reach economic prosperity can the environment be worth taking care of.

The Environmental Kuznets Curve Hypothesis

The Kuznets Curve hypothesis was first proposed by Simon Kuznets in the 1950s. As can be seen, it demonstrates that economic development initially leads to environmental degradation but after a certain level of economic growth, the country begins to ameliorate its environmental relationship and the trend begins to reverse.

Ideal Representation of the ideal Economic Kuznets Curve ^

In economic theory, lesser developing countries predominantly focus on agriculture, developing on industrialization and developed economies on providing services.

The graph adds up somehow doesn’t it? Agriculture (a sector dominant in pre-industrial economies) doesn’t use as much electricity or industry establishment to produce, hence emissions are limited. As an economy industrialises, mining becomes active, factories open up, power lines are set up and roads are built for robust transportation of goods; all of which contribute to rising emissions. As an economy moves towards providing services and adding value through capital goods (such as selling securities and financial assets), the need for emissions reduces, since selling government bonds won’t really need you to run that generator now, would it?

With a rise in real GDP, a government’s priorities are also likely to change to achieving higher standards of living. Most econometric data on standards of living 2 includes environmental preservation; either directly or indirectly. For instance much of Norway existed in sub-standard/standard levels of income compared to the rest of Europe in the 20th Century. Which is until they found $1 Trillion of Oil in the region of Svalbard. The wealth amassed by Norway in a short span of time allowed the government to pass extensive environmental protection legislation. In fact in 2019, as Norway topped real GDP per capita rankings consistently, Norway became the first country in the world to ban deforestation completely. As priorities change so does the nature of legislation since governments that prioritize general well being are elected into office.

Another factor is people’s personal choices. A higher disposable income normally results in a greater amount of dispensable wealth which could be used to make environmentally friendly decisions. Sales of free-range eggs for instance are significantly higher in European countries than in South-East Asian economies.

Additionally, the technical prowess of developed countries to produce sustainable products and cut emissions, all while either maintaining costs or marginally increasing them also causes a parity in emission-reduction efforts.

This line of thinking was underway in the emerging idea of sustainable economic development propagated by the World Commission on Environment and Development (1987) in Our Common Future. The possibility of achieving sustainability without a significant deviation from business as usual was obviously enticing. With the establishment of a trend between developing countries and developed countries’ emissions, it would be easy for you to assume that an Environmental Curve does in fact exist. Not only do the general nature of developing and developed economies suggest so, but also other external factors.

Why the EKC is simply an empirical phenomenon.

The problem with the EKC is the same as the Economic Kuznets Curve, modeling it with data makes its case econometrically weak. In accordance to our data, For instance, the United States has higher CO2 emissions per capita than India , even though US GDP per Capita (GDP divided by the population of the country) stands nearly 30 times that of India (nominal). Mathematically the EKC runs into further problems since it more or less assumes economies at the same level of income will be of the same nature (i.e developed economies will necessarily be service oriented and lesser-developing will necessarily depend on agriculture). Alongside other critical assumptions we often make with the model itself.

Another reason this is proven to be incorrect in contemporary economics is because economies have less simplified structures than the standard theoretical models. For instance, the majority of India’s workforce is employed in the agriculture sector but major GDP contribution is made by IT Services. Despite the two sectors that should be producing relatively less emissions, India’s total emissions rank consistently high across the world since its industrial sector does not enforce strict environmental regulation.

This hasn’t stopped politicians and leaders from employing this hypothesis in contemporary policy-making. We both know after all that science and politics rarely ever goes hand-in-hand anymore.

Egregiously employing the EKC hypothesis

During the Paris Accord (2015), 178 countries were asked to make promises towards an environmentally friendly tomorrow. Without getting into the nitty-gritties, the problem with this legislation was its mixed nature. The Paris Agreement is a treaty within the boundaries of the Vienna Convention on the Law of Treaties, however, not every provision of the agreement creates a legal obligation. It consists of a pack of binding and non‐binding provisions relating to parties’ mitigation contributions, largely contributing to the ambiguous and on face the outright farce nature of some of the promises made under the agreement.

Countries such as India and Pakistan which quite possibly fall in the centre of our hypothesized Kuznets curve, made ambivalent promises. India didn’t even promise to limit emissions, instead they promised efficiency at a rate less than their current efficiency levels . In effect their only promise was to slow the increase of emissions, under the label of reducing ‘emissions intensity’ rather than raw footprint. Pakistan pledged to somewhere peak emissions and then reduce them, promising no clear time frame or commitment. Even countries in the later half of our Kuznets curve with relatively higher GDP Per Capita, made false promises in hopes of publicity. China despite being the world leader in carbon emissions promised to further increase emissions till the year 2030, and then cut down. Makes you wonder as to whether this gives China the license to artificially keep increasing emissions data till 2030 and then cut down to normal levels to fulfill their promise?

Even though not explicitly, many developing countries put their faith in the Environmental Kuznets Curve to justify ‘grow now, care later’ policies towards the environment. Forgoing two main environmental economics fundamentals - the inferior natural rate of replenishment of resources and structural economic dependency on unsustainable platforms which develops as you keep growing at the cost of environmental degradation.

What can we do?

Try to understand what lawmakers in your constituency are trying to do in terms of the environment. Are they scapegoating the environment in the promise of economic prosperity? If so, try to raise awareness and accountability of lawmakers towards both issues. Tackling both issues hand-in-hand is not difficult. Further listen to what sustainability experts have to say, more often than not their advice tackles both the economy and the environment.

More importantly don’t buy into promises of unsustainable economic growth, call out these promises if necessary. Most modern world economies can afford to sustain their citizens on a decent standard of living, hence scapegoating the environment can only result in greater damage and quite often fill the pockets of lawmakers through wealthy corporate lobbyists.