Friday, February 19, 2016

Alan Krueger and the "Environmental Kuznets Curve."

In 1994 Krueger -- one of the former CEA chairs who signed the Sanders letter -- and Gene Grossman published a paper titled "Economic Growth and the Environment." They studied four kinds of environment pollution and the countries' per capita income. They found "no evidence that environmental quality deteriorates steadily with economic growth. Rather, for most indicators, economic growth brings an initial phase of deterioration followed by a subsequent phase of improvement."

This finding subsequently became known as the "Environmental Kuznets Curve" by analogy with the Simon Kuznets's finding, once upon a time, of income inequality first rising with economic growth and then subsequently decreasing as growth continues. Ask Thomas Piketty about the robustness of that empirical theory.

A couple of years later, David Stern and associates published a critique of the Environmental Kuznets Curve theory. They pointed out that the inverted U shape relationship between environmental degradation and economic growth depends on the unrealistic assumptions that there is "no feedback from the quality of the environment to production possibilities" and "trade has a neutral effect on environmental degradation." Furthermore, the inference from some studies "that further development will reduce environmental degradation is dependent on the assumption that world per capita income is normally distributed when in fact median income is far below mean income."

This is not to disparage Krueger and Grossman's research or their findings but to point out that the implications of those findings were subsequently blown out of proportion by people who ignored the study's limitations. That enthusiasm has fostered an industry of unwarranted EKC optimism. Again, ask Piketty how that Kuznets Curve thing is working out.

There does appear to be an inverted U curve for SOME pollutants. Other pollutants get exported by rich countries to poor countries -- see the infamous 1991 Summers/Lant Pritchett  memo on toxic waste for a sarcastic commentary on that potential. And, last but not least there is no Environmental Kuznets Curve for global greenhouse gas concentrations.

Nevertheless, wishful thinking based on the EKC concept perennially fuels optimism about the prospects for "decoupling" GHG emissions from economic growth. Some of the boosters of decoupling even talk about "stabilizing" GHG emissions at current levels while growth continues. The decoupling fantasy sidesteps the reality that massive reductions in emissions -- not just stabilization -- are required to stop the continued increase in atmospheric GHG concentrations.