Saving the Environment: Economic Growth and Sustainability
The Environmental Kuznets Curve is an elegant idea. It says that as countries industrialize, pollution first gets worse, then — past some income threshold — gets better, tracing an inverted U. Rich enough to care, rich enough to fix it. The theory has a comforting narrative attached: growth solves its own mess, eventually. For sulfur dioxide and some particulates, the empirical support is real. For CO2, it essentially does not exist. Carbon emissions correlate with income at nearly every level we have data for, and there is no sign of a turning point at any income level yet observed. Which puts something of a dent in the “growth will clean it up” school, if not in its political usefulness.
China’s 11th Five-Year Plan, ratified by the National People’s Congress in March 2006, contains a target that deserves more attention than it has received: a 20% reduction in energy intensity — energy consumed per unit of GDP — by 2010. For an economy running at 10% annual growth and building a coal-fired power plant roughly every week, this is an ambitious commitment. It is also a significant shift in official language. The 10th Five-Year Plan had an analogous target that was largely missed. Premier Wen Jiabao has acknowledged the miss publicly, which is unusual, and the 11th Plan has written the target into provincial government accountability reviews. Whether carrots and sticks aimed at local cadres translate into actual kilowatt-hour reductions is a question that remains to be answered.
In London, Nicholas Stern — former World Bank chief economist, now head of the U.K. Government Economic Service — has been working since July 2005 on a comprehensive economic review of climate change commissioned by Chancellor Gordon Brown. The report is expected in late 2006. Stern is by training a development economist, and his framing of the problem is notably different from the engineering-cost approach that dominated early climate economics. His team is trying to model the expected damage from a 2–3°C warming in terms of lost GDP, disrupted agriculture, health costs, and what actuaries call tail risk: low-probability, catastrophic outcomes. The preliminary numbers circulating in academic seminars are larger than most people expect.
Kyoto entered into force in February 2005. The United States, which accounts for roughly 22% of global CO2 emissions, remains outside it. Australia likewise. The arithmetic of stabilization is therefore not helped by the legal architecture. To hold atmospheric CO2 at 550 parts per million — already the less stringent of the targets discussed — rich countries would need to cut emissions by something like 80% from 1990 levels even if developing countries manage to hold roughly flat. “Hold flat” means India and China would need to decouple economic growth from emissions growth at a rate that no country has ever achieved during rapid industrialization. The math closes only if you assume both very aggressive technology deployment and something close to full-cost carbon pricing in the developed world.
India’s trajectory is worth dwelling on. The country is in the middle of a coal-fired electricity expansion that is less discussed than China’s but nearly as consequential. The Planning Commission projects that India will need to roughly triple electricity generation by 2031, and the bulk of the additional capacity will come from domestic coal. Clean coal and integrated gasification are on the agenda but off the balance sheet — expensive technologies for an electricity sector that cannot currently keep the lights on in Mumbai reliably. Brazil presents a different set of problems: roughly 70% of its electricity is already hydroelectric, which is low-carbon, but deforestation in the Amazon is proceeding at a rate that the Brazilian space agency INPE estimated at 26,130 square kilometers in 2004 alone, making land-use change the dominant emissions source.
The honest version of the debate is that there is no painless path. Every stabilization scenario that climate economists take seriously requires that rich countries bear costs in the near term — in the range of 1–2% of GDP annually, by most estimates — in exchange for avoided damage that will accrue mostly later and mostly elsewhere. That is a hard trade-off to sell to any electorate, which explains why so much of the policy discussion retreats to voluntary targets, technology partnerships, and the hope that the EKC inverted-U will somehow appear for CO2 once the data gets richer. It probably will not.
The distributional question is where it gets politically toxic. Poor countries did not generate the stock of accumulated atmospheric carbon. They are entitled to point this out, and they do. The counterargument — that a rapidly industrializing China or India will add so much to the flow that stock arguments become moot — is correct as arithmetic but does not resolve who should pay for the transition. The full case for why development economists should care about this, rather than leaving it to natural scientists, is made well by recent work on the distributional politics of globalization. Benjamin Friedman’s argument, which I covered earlier this year in the context of growth and democratic stability, applies here too: societies that feel economically squeezed do not make patient long-run environmental decisions. And the electricity and infrastructure strain already visible in Guangdong suggests that China’s 20% intensity target will be tested against real competing pressures almost immediately.