More Sound than Fury? Decarbonization, Dematerialization, and Environmental Kuznets Curves

The environmental Kuznets curve suggests that beyond a certain level of per-capita income, adverse environmental trends begin to reverse themselves. How valid is this proposition, and to what extent can we be reassured that, sooner or later, some combination of market responses and policy initiatives will put the environment on the right track?

Some economists now studying economic, energy, and related trends see evidence that points to a more benign environmental future than is commonly presumed. In technical language, they speak of an environmental Kuznets curve, and of decarbonization and dematerialization. So what do these terms mean and how do they overlap?

The Environmental Kuznets Curve

Simon Kuznets was a Nobel-winning (1971) economist whose work centered on shifts in economic structure and income distribution of nations over time. He posited that an observable degree of income inequality at early stages of industrialization subsides with time.  Whether Kuznets’ observations have an analogue in the environmental arena—what happens to environmental quality as income grows?— is debatable. Efforts to recast “Kuznetsian” analysis along environmental lines have typically had an anecdotal and premature quality that sharply differs from Kuznets’ own empiricism and meticulous research.

Undaunted, environmental economists continue to be intrigued by the Kuznets question, and some have developed sophisticated econometric modeling to refine the curve in progressively more discriminating and differentiated ways: What per-capita income levels in what countries attest most conclusively to the underlying intuition of the curve? Which pollutants best support the hypothesis? Not least, with evidence that rising pollution is not a necessary consequence of rising prosperity, is there an opportunity for public policy to try to break any link? That is, if environmental quality deteriorates up to some level of per-capita GDP—say, $12,000—but improves thereafter, can policymakers dampen pollution at earlier stages of income growth and impel still faster improvement at later stages? Or do the observations mean that the situation is not amenable to policy intervention? The environmental Kuznets curve (EKC) suggests that, over time, society’s economic growth begets an ever-rising willingness to expend resources on environmental improvement. Let’s say 5 percent of base-year income was spent on environmental services of various kinds; then 5 percent-plus of income growth will be so spent, by individuals, firms, or the government. Sales of Spam may be insensitive to higher income; not so a willingness to pay for a cleaner environment.

A stylized representation of the EKC takes the form of an inverted U, with income increasing horizontally and pollution vertically. It implies that poor countries, in their initial growth spurt, become still more polluted, but with economic progress they begin reversing that trend as they recognize the benefits of a cleaner environment and enjoy the wherewithal to pay for it. Such willingness might be reflected in resources devoted to reducing sulfur dioxide (SO2) emissions and concentrations. Indeed, the SO2 case has often figured in empirical tests of the EKC hypothesis: recognizing the effects of ambient air quality on local citizens’ health and recreational amenities, society willingly allocates an increasing share of its (growing) income for enhanced environmental integrity.

I have no basis for disputing the logic and inferences drawn from analysis of historical data that lends itself to testing the EKC hypothesis, but I wonder whether that research is sufficient for predicting future income-environmental relationships. In many ways, SO2 is a singular case, with a substantial coincidence of interests between community and individual benefits that generates political consensus and a collective willingness to pay. In contrast, the hesitancy of the United States, Australia, and Canada to act on greenhouse gas mitigation may invite a more thorough testing of the EKC. The World Bank, in its 2010 World Development Report, states, “Concern about climate change decreases as wealth goes up” and cautions that “awareness of environmental problems normally increases with wealth, but concern about climate change does not.” I think a more apt observation might invoke the problems of “free ridership” and global governance: even countries whose expressed concern about climate change rises with wealth may hesitate about bearing mitigation costs (disproportionate costs, in their view) in the absence of an effective worldwide climate policy regime.

So, is the EKC a reliable metric of the environment–economic growth nexus?  As the saying goes, “Hindsight is always 20–20.” Even if historically persuasive, the durability of the EKC for the future needs to be judged cautiously. Right now, it is climate change that seems to have center stage. Looking ahead, it is certain that measured economic growth will present new sets of environmental problems that are not commonly viewed as environmental today. Some future Kuznets modeler will perhaps contend with such issues as noise, congestion in national parks, and intrusion into rural landscapes.

Decarbonization and Dematerialization

Joel Darmstadter

Somewhat overlapping with the EKC phenomenon, decarbonization and dematerialization refer to advanced societies’ decreasing dependence on fossil fuels and energy-intensive manufacturing sectors as their economies become more high-tech and service oriented. The United States and France are cited examples. Economists exploring dematerialization and decarbonization also begin by dissecting past trends and then ponder the implications for the future. Here as well, even though the empirical base is sturdier and extends over a much longer period, no inexorable future development can be divined from these concepts, especially decarbonization.

Consider the headline for John Tierney’s New York Times column of April 20, 2009: “Use Energy, Get Rich and Save the Planet.” The column, no doubt prompting some readers to breathe a sigh of relief , reports on the observations of Jesse Ausubel and Paul Waggoner: namely, that given long-term structural changes in the U.S. economy (and by extension, other advanced societies), dematerialization and decarbonization can at least attenuate concerns about unrelenting reliance on fossil fuels, especially carbon-intensive coal.

There is much about the dematerialization notion that resonates intuitively: as a country moves toward an advanced industrial status, structural changes in its economy promote slower growth in energy use than in overall economic output. Although the declining trend in America’s energy-GDP ratio reflects diverse influences, including higher energy prices, more efficiencies, and technological advances, dematerialization was a factor. It seems reasonable to expect that experience to be replicated.

But whether a declining energy-GDP ratio is accompanied by a still-sharper decline in the CO2-GDP ratio—that is, whether what energy is consumed becomes persistently leaner in carbon content—is a trickier question. Certainly, that has not been the U.S. experience. And even if a country has not just a falling energy-GDP ratio but a falling CO2-GDP ratio as well, there may be no “invisible hand” driving it toward cleaner fuel. In France, for example, it was government-owned and subsidized nuclear power rather than the marketplace’s rejection of coal that caused decarbonization, and South Africa’s deliberate exploitation of domestic coal to produce liquid fuels and generate electricity is scarcely a poster child for the notion. Those examples remind us that public policy has a significant and not necessarily benign, environmental influence.

In short, the EKC, dematerialization, and decarbonization aren’t in themselves reliable safety valves against environmental distress. But they do offer the prospect of at least some “automaticity,” lessening the burden that will need to be addressed by explicit policy initiatives.

Joel Darmstadter is a senior fellow at RFF.

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