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posted on 01 October 2017

The Effects Of Economic Growth On Pollution

from the St Louis Fed

As an economy grows, so does pollution. However, the two don’t move in lockstep, as a recent Economic Synopses essay shows that pollution increases at a slower rate than economic growth.

An Environmental Kuznets Curve Ball

Research Officer and Economist Guillaume Vandenbroucke and Research Associate Heting Zhu’s conclusion contrasts with an older hypothesis in this literature called the “environmental Kuznets curve" or EKC.

The EKC variation posits that pollution increases with economic growth in the early stages of development. Beyond a certain level of development, however, the trend reverses, and economic growth improves environmental conditions by creating the resources to do so.

Vandenbroucke and Zhu noted that a 2004 paper found that pollution rises monotonically with economic activity.1 “A 1 percent increase in economic activity raises pollution but at a slower pace. That is, pollution is increasing more slowly than GDP," Vandenbroucke and Zhu wrote.

Three Kinds of Pollution

In the essay, the authors looked at three kinds of pollution typically generated by economic growth:

  • CO2 emissions
  • Greenhouse gas emissions overall
  • PM2.5 particulate matter emissions

CO2 and GDP per Capita

According to the Environmental Protection Agency, CO2 emissions - the most abundant greenhouse gas - increased at an average annual rate of 0.4 percent between 1990 and 2014, the authors noted. Meanwhile, GDP per capita increased at an average annual rate of 1.4 percent.

“Thus, the average person in the United States has benefited from relatively ‘cleaner’ goods and services produced with fewer emissions of CO2," the authors wrote.

They noted that CO2 still rose over the period studied, and the impact on climate is beyond the scope of their essay. “The point here is that the increasing level of CO2, which is detrimental to well-being, coincides with an even greater increase in GDP per capita, which advances well-being," Vandenbroucke and Zhu said.2

Greenhouse Gas Emissions

Between 1990 and 2014, greenhouse gas emissions increased by 0.28 percent on an average annual basis, again lower than the 1.4 percent average annual increase in GDP per capita.

They also noted this pattern holds when the economy slows down: Greenhouse gas emissions declined at an average annual rate of 1.2 percent from 2005 to 2011, or the period encompassing the Great Recession, while both GDP and population increased at an average annual rate of 0.9 percent.

“Thus, GDP per capita was stagnant, while total greenhouse gas emissions decreased," the authors noted.

PM2.5 Particulate Matter Emission

Vandenbroucke and Zhu then looked at another form of pollution: particulate matter. In particular, they looked at PM2.5, which measures the concentration of particles less than 2.5 micrometers in size in a given volume of air.

When looking at the relationship between PM2.5 and GDP per capita across countries from 1990 to 2015, Vandenbroucke and Zhu found a negative correlation. “In other words, one unit of GDP per capita can be produced with fewer particulate matter emissions in countries with high GDP per capita," they wrote.

Pollutants and GDP

A nation’s economic growth can contribute to several different kinds of pollution, affecting health and motivating policymaking decisions.

“Our point is not to dispute the quantity of pollution, nor is it to argue about the effects of pollution on people’s health or the climate," Vandenbroucke and Zhu said. “Instead, we suggest that the costs of pollution should be assessed relative to the benefit of said economic activity. If both economic activity and pollution are rising, one ought to ask whether the costs are rising faster than the benefit...or the opposite."

In sum, “We find that pollution in the United States, measured by particulate matter or CO2 emissions, rises with economic activity, but at a noticeably slower pace," they said.

Notes and References

1 Stern, David I. “The Rise and Fall of the Environmental Kuznets Curve." World Development, August 2004, Vol. 32, Issue 8, pp. 1419-39.

2 The authors noted that this does not imply that welfare increases just because GDP per capita increases faster than CO2 emissions. That is, welfare can either increase or decrease, depending on how the increases in GDP and CO2 affect it.

Additional Resources

Source

https://www.stlouisfed.org/on-the-economy/2017/september/effects-economic-growth-pollution

Disclaimer

Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

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