The Environmental Kuznets Curve

The summary below is adapted from Susmita Dasgupta, Benoit Laplante, Hua Wang, and David Wheeler, “Confronting the Environmental Kuznets Curve,” Journal of Economic Perspective 16, no. 1 (2002).

The Kuznets Curve is an inverted-U relationship between pollution and development. According to the model, pollution increases until a nation achieves ~$5,000-8,000 per capita income, and declines thereafter. What the curve illustrates is that the stakes in pollution-control efforts are high.  China and India both already have very high pollution levels, but neither country is anywhere near its maximum level yet, according to the Kuznets model.  Things are going to get worse before they get better.

Pollution decreases at higher incomes because high income societies have more discretionary capabilities for pollution reduction.  The primary factor in the downslope of the curve, however, is government regulation, which can make a difference even in low-income nations.  The problem is that low-income nations often have neither the motivation nor the capability to enforce such regulation. As the chart below illustrates, regulation usually increases with income levels.  The international community can help by subsidizing information and regulation in these countries. Sanctions, by contrast, don't work and can only be counterproductive. We have to be realistic in our expectations of these low-income countries.

Another factor that reduces pollution is economic liberalization.  This is because illiberal governments’ subsidies typically go to polluters, and because private enterprise is more efficient than state-run enterprise, and thus produces less pollution per unit of production. Openness to trade also improves access to cleaner technologies. But although liberalization helps, it is insufficient unless regulations are strengthened.

Sometimes regulation can be informal, at the market or local level. Investors and consumers allocate capital to lower polluters. Evidence shows that firms do respond to these pressures—especially the big multinationals. (In fact, multinational corporations are much better at and more committed to pollution reduction than smaller companies.)  Often, though, market and local actors aren’t aware of pollution risks. Increased information can help enhance informal regulation.

Pollution taxes have been very successful in developing countries. Better information can improve regulation in these countries, as well. It turns out that the hidden costs of pollution are very high, especially for big cities. When poor governments become aware of these hidden costs (such as health care costs or foregone tax income due to premature deaths of workers), they often crack down.

The Kuznets curve model does seem to hold for existing toxins, but pessimists have raised one valid criticism: new technologies do give rise to new toxins, most of which are currently unregulated and unmonitored even in developed countries.  We are going to have to be vigilant about detecting and controlling new pollutants.