Series Editor: Ian Parry
Managing Editor: Felicia Day
Assistant Editors: John Anderson and Adrienne Foerster
Next week, University of Chicago economist and RFF university fellow John List will discuss what environmental policymakers can learn from the field of experimental economics.
Green Cities and Economic Development
Matthew E. Kahn
Understanding the relationship between economic development and urban environmental quality is no mere academic exercise. In 2000, 80 percent of the U.S. population lived in a metropolitan area, and worldwide the fraction of people living in cities is projected to rise from 30 percent in 1950 to 60 percent in 2030. Not only are the population numbers large, but the conflicts and conundrums are very real. Some rapidly growing cities, like Beijing, suffer from severe environmental degradation, but others are able to preserve or even enhance their environmental quality. Air quality improved steadily in Los Angeles between 1980 and today, despite an over 85 percent increase in automobile usage.
All cities face "tragedy of the commons" problems. No one individual driver, manufacturer, or institution has sufficient incentive to economize on pollution production. The sheer scale of cities means that when millions of economic actors each pursue their narrow self interest the city can turn brown. While population growth scales up this problem, adding millions of more polluting producers and consumers to the small geographical area, income growth offers the possibility of both greening and browning the city.
The main contribution economists have made to sorting out the relationship between income growth and environmental quality is the Environmental Kuznets Curve (EKC), which models the relationship between economic development and pollution levels over time. By many indicators, environmental quality initially declines as poorer cities develop; for example, as people grow richer, they switch from bikes to cars and demand larger housing units with more energy-using appliances.
However, as growth continues, a turning point is eventually reached, and thereafter, environmental quality improves as incomes rise. Development triggers offsetting effects on pollution, most notably by shifting consumption and production in greener directions and by giving policymakers the mandate and the resources to implement regulation that reduces pollution. Take the case of Los Angeles. Under state law, car companies were required to produce vehicles with lower emissions per mile, which lead to an overall decline in air pollution, even as rising affluence caused the total number of miles driven to increase.
But this is one highly conditioned example. If the EKC hypothesis is true, trends in per-capita income underestimate overall changes in well-being in rich cities but overestimate such trends in poorer ones. Some World Bank economists have argued that the trade-offs between development and the environment improve over time, though data limitations make it very difficult to confirm this hypothesis.
Their optimism is based on the claim that developing countries can adopt greener technologies previously developed in richer nations and learn from the regulatory mistakes of richer nations. If this is true, developing nations can expect to benefit in two ways. First, they are likely to reach the peak of the EKC earlier in their development than other nations have in the past. Second, they will suffer less environmental damage before reaching the turning point.
The stakes in this debate are high. Per-capita GDP in 1998 (in purchasing parity dollars) was $1,440 in sub-Saharan Africa, $2,060 in India, and $3,051 in China, nowhere near $8,000 per capita, the figure currently suggested in the empirical literature for when the relationship between environmental quality and economic growth appears to peak and then turn down.
Perhaps the most important problem with the EKC is that it may have little relevance for pollution problems that are borne by others rather than just city residents. The obvious example here is global warming, where greenhouse gases released from one city potentially affect future generations around the globe.
Urban population growth, as distinct from per-capita income growth, poses additional challenges. By concentrating a large number of people and firms within a small geographical area, pollution levels rise. The greatest problems arise when population growth is unexpected, as in times of war and famine, and the government is not up to the job of responding by scaling up infrastructure. As poor migrants enter a city, they increase the demand for basic services, but typically are incapable of contributing financially to their supply. The resulting water pollution, contagion, and absence of trash removal all raise the risk of serious health epidemics.
Megacity urbanization also weakens the pressure for environmental improvement in a more subtle way. In developed nations, decentralized competition between cities creates an incentive for politicians to adopt green policies; if they do not, residents may "vote with their feet" by re-locating to other cities with a better quality of life. While enormous metropolitan areas, such as Los Angeles and New York City, contain less than 5 percent of the U.S. population, elsewhere the percentages are far more imbalanced: for example, in Argentina, 30 percent of the nation's population lives in Buenos Aires, the largest city. When the urban population in a country is concentrated in one or two megacities, local governments are less concerned about losing population to other cities through lax environmental controls.
Of course, cities differ in their ability to absorb population growth without experiencing local environmental degradation. Some of the factors that affect the relationship between growth and sustainability are relatively immutable, such as climate and geography. But the quality of governmental institutions also plays a key role in determining whether a city will be able to successfully cope with population growth. Long-term planning requires resources and expertise. In the best of all possible worlds, urban planners would be able to forecast likely urban growth over the next 20 years, and, anticipating this growth, city leaders would take proactive steps to limit its environmental impact and finance necessary infrastructure upgrades.
Views expressed are those of the author. RFF does not take institutional positions on legislative or policy questions.
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Hilton, F., G. Hank, and Arik Levinson. 1998. "Factoring the Environmental Kuznets Curve: Evidence from Automotive Lead Emissions." Journal of Environmental Economics and Management. Vol. 35, No. 2 March 1998. pp. 126-141.
Kahn, Matthew E. 1999. "The Silver Lining of Rust Belt Manufacturing Decline." Journal of Urban Economics, Issue 46, no. 3: pp. 360-376. 1999.
Kahn, Matthew E. 2006. Green Cities: Urban Growth and the Environment. Brookings Institution Press.
Moomaw, William R. and Gregory C. Unruh. 1997. "Are Environmental Kuznets Curves Misleading Us? The Case of CO2 Emissions." Environment and Development Economics October 1997, Vol. 2, Issue no. 4, pp. 451-463.
Schmalensee, Richard, Thomas Stoker, and Ruth Judson. 1998. "World Carbon Dioxide Emissions: 1950-2050." Review of Economics and Statistics Vol. 80, no. 1, pp. 15-28.
For data on air quality in different regions of the United States, see the Environmental Protection Agencies AirData webpage.
For international urban air quality data, see World Bank, 2001. World Development Indicators 2001, Washington, DC