Air pollution and economic growth: Intertemporal and cross-national relationships

A development debate focuses on whether the transition from agricultural to industrial and service economies can be made with acceptable environmental consequences. Empirical and theoretical work has been done on a pattern called the environmental Kuznets curve (EKC). It appealingly suggests that the transition will result in initial environmental degradation but ultimate improvement. ^ This dissertation studies general relationships between air pollution and economic growth with EKCs as a special case. Neoclassical growth models used include, for the first time, important distinctions between pollution from production and polluting consumption. Also studied are intertemporal versus cross-country patterns. These are important since intertemporal results are often inferred from cross-sectional data when data records are short. The theoretical literature has thus far focused on “steady state” behavior. The paths to steady states are crucial, however, for social welfare comparisons and policy analysis. Time elimination methods are used here to obtain these paths. Simulations examine model assumptions, relationships between pollution and growth, and welfare consequences of modeled policy formulations. Results are given for aggregate and per capita models of pollution from production and production and polluting consumption jointly. These are compared to a simple Ramsey model which ignores pollution disutility. ^ Results show that environmental Kuznets curves can occur but are not a favored pattern. EKC existence appears more likely for countries with advanced production technology. Factors such as intertemporal discounting are less important. Modeling the pollution disutility represents a perceived welfare reduction over the case of consumption without consequence but more fairly represents pollution\u27s effects. Further consideration of “clean” versus “dirty” consumption adds a policy option and another dimension to improve welfare. Population is important in that individual\u27s utilities are based on individual consumption but combined pollution from the whole population. As a result, population is very important in the models but population growth precludes establishment of a steady state solution. ^ The EKC issue appears to be a secondary effect in that conditions leading to EKCs are favorable pollution reduction over all. In models tested, intertemporal EKCs result in cross-country EKC patterns and vice versa, but the restrictive model assumptions preclude wider generalizations.