Conclusion and suggestions for future research

The relationship between economic growth and the environment is not well understood: we have only limited understanding of the basic science involved - be it physical or economic - and we have very limited data.

This is a research topic on the periphery of growth theory proper. It placement reflects the lack of a core model to work with and the paucity of data for empirical analyses. This is unfortunate because an understanding of the relationship between economic growth and the environment may be key to long run prosperity; it is certainly of interest to developing country governments searching for a balance between material growth and environmental protection, and it is also of great interest in the developed world given current debates over global warming, its costs, and the costs of its amelioration.

Our review has revealed much heterogeneity in terms of approach and methods used in theoretical work. Some heterogeneity is to be expected, but too much dissipates effort. By examining the pollution creation and abatement process in some detail we hoped to direct future efforts more productively. We showed that standard assumptions such as CRS and concavity of the abatement production function lead to tractable formulations where pollution emissions appear in much the same way as other factors.

Our theoretical review contains three main messages. The first comes directly from our Green Solow model where we showed how the typical convergence properties of the neoclassical model together with a standard natural regeneration function yield an Environmental Kuznets Curve. This suggests that efforts to explain the EKC via com­plicated processes of political economy, IRS, freer trade, and differential factor growth, etc. may be unnecessary. At the very least it points out that the interplay of natural and Solow growth dynamics certainly work towards this finding.

Our second message concerns drag. We have shown throughout that efforts to limit pollution and raise environmental quality create a drag on growth rates. This finding was stronger in some cases since rapid population growth could eliminate the possibil­ity of sustainable growth entirely. The drag calculations we provided are for illustration and not meant to substitute for more serious enquiry that must include empirical esti­mation of key parameters. Nevertheless these calculations are helpful in focusing our efforts on key parameters (the share of emissions in final good production or the rate of change in pollution abatement costs), and demonstrate how difficult it is to generate sustainable growth in a country with significant population growth. The calculations also offer a quick litmus test; if a specification suggests environmental policy reduces growth by 40%, something is surely amiss.

Finally, we have shown how different assumptions on abatement can produce very different results for sustainability (recall the contradictory results of Smulders and Stokey in the AK model). To a certain extent progress in this literature has been slowed because researchers have too many degrees of freedom in choosing their specification. Some restrictions are imposed by the requirement of a balanced growth path, but this still leaves much leeway to the researcher. We have adopted a consistent specification of pollution creation and abatement based on the common, if not innocuous, assumptions of constant returns, concavity and pollution being a joint product of output. Within these confines we have then argued that technological progress in abatement, distinct from that in final goods, is key to generating sustainable growth at reasonable costs. By identifying this as a key requirement we hope to direct future research efforts towards a theory of induced innovation where both relative prices and pollution regulations deter­mine the pace and direction of improvements in abatement technology.

Our review of empirical work shows that the existing literature has made relatively few contributions to our understanding. The Environmental Kuznets Curve stands out as a key empirical regularity, but continued progress in this area can only come with a more serious consideration of other related data. One contribution of this review has been to show that many of the theoretical models capable of generating an EKC also contain predictions in other directions that are worthy of examination. The simple Green Solow model had strong predictions for the emission intensity of GDP; the Stokey Alternative contained sharp predictions about the time profile of abatement costs; the Source-and- Sink model contained links between energy prices, energy use, and pollution levels; and finally, the Kindergarten model produced a cross-country catch-up hypothesis as well as yielding several within-country but across-pollutant predictions.

This review has been limited by its focus. It has been a review of work linking in­dustrial pollution and growth with only small asides to consider natural resource use. In many cases the formal structure of the models resembled those in the renewable re­source literature, but we did not provide a review of findings there. As such we have sidestepped the rather thorny issues of property rights protection and the efficiency of environmental policies. We have done so not because we believe that these issues do not merit attention, but rather because adding a useful discussion of these topics would make this review unwieldy. It should be emphasized however that a common feature of the resources we examined was their well-defined property rights. This is true for air quality when the quality is determined by local pollution; and it is true of oil and other energy resources.

There are however an important class of resources where property rights enforce­ment is lax or where no property rights exist at all. Property rights problems arise in three main areas. These are: local and transnational fisheries; the global atmospheric commons; and lastly, the forest stocks in many developing countries. It is somewhat ironic that these renewable resources are under far more threat than the so-called ex­haustible resources such as oil, gas or minerals. The reason for this is inescapable: the diffuse nature of many of these resources has led to a lack of property rights and very little management. Therefore, while our focus on industrial pollution is perhaps defen­sible in that it determines the air quality and health prospects for hundreds of millions of people across the globe, we should not forget other vexing problems arising from the lack of property rights. And while our data and the existing empirical results sug­gest that many local pollution problems are well in hand or respond well to increases in incomes brought about by growth, global pollution problems, such as global warming, are far more difficult to solve.^[530] Therefore, it may be that the real threat to continued growth arises not from the relatively small drag introduced by existing environmental policies, but from the absence of new policies to stem more serious global problems.

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