Download Economic Growth, Environment and Climate Change (2008)

 Economic Growth, Environment and Climate Change September 2008
Anders Ekbom and Emelie Dahlberg
Environmental Economics Unit
Economic Growth, Environment and Climate Change1
Sept 19, 2008
The purpose of this paper is to shed light on the links between economic growth,
environment and climate change, and some challenges associated with these issues.
The summary of evidence is primarily based on recent research and focus on issues
addressed in the research literature. Some underlying questions and assumptions
provide a rationale for studying this issue; particularly interesting ones - addressed in
this paper - include statements and views like: Growth is bad (alternatively: good,
necessary) for attaining environmentally sustainable development (growth
optimism/pessimism); Natural resource abundance is bad for growth (the resource
curse hypothesis); Stringent environmental policies, combined with increased market
liberalization and international trade, trigger migration of dirty industries in richer
countries to poorer countries with more lax environmental regulation (the pollution
haven hypothesis).
Other research issues and hypotheses examined in this paper include: Environmental
improvements will come as a natural effect of stringent environmental policies via
innovation, compliance, increased resource efficiency and improved technologies (the
Porter hypothesis); Robust economic growth and broad-based poverty reduction must
be attained first before more ambitious environmental investments can be made (the
growth first-argument); Countries’ environmental situation has to worsen before it
can improve (environmental change follows the Environmental Kuznets Curve);
Natural resource scarcity implies an unavoidable constraint on countries’ economic
growth capacity (limits to growth); It is possible to attain growth and large-scale
poverty reduction along with environmental improvements (decoupling).
Although climate change relates to “environment” and is a sub-set of environmental
change, the paper addresses climate change, with links to economic growth and
poverty reduction, in a separate section.
Basic Links between Economic Production and Environment
The natural environment plays two key roles in relation to economic growth. First, the
natural environment provides natural resources, which function as inputs to
production of goods and services. The inputs can be direct or indirect. Second, the
natural environment functions as a sink to pollutants which are generated from
economic production and consumption. Examples include hazardous air, water and
solid pollutants which are dissipated in the natural environment, which is also a
repository for solid and toxic waste. Within certain ecological limits, the natural
environment has some absorption capacity of external pollution.
1
This document has been written by Anders Ekbom and Emelie Dahlberg at Sida’s Environmental
Economics Helpdesk, Department of Economics, University of Gothenburg. The text is written at the
request by Jessica Andersson and Mikael Söderbäck, Sida as an analytical input to Sida’s strategy on
growth in development cooperation. The authors would like to thank Ola Olsson and Kattie Millock for
useful advice.
2
When the functions of the natural environment are seriously impaired, economic
growth can slow down or even be negative. This is the case when access to natural
resources goes down rapidly or in absolute numbers over time, for instance when
stocks of fish, forests or minerals are being depleted, or when nature’s capacity to
absorb or dissipate waste and pollutants is exceeded and when environmental quality
is reduced. Growth may be limited due to policy responses which imply costly
investments in pollution abatement or mitigation, which have lower economic
productivity and returns compared to alternative investments. Growth may also be
limited due to irreversible effects on nature’s ecosystems and the goods and services
produced by them.
Moreover, economies specializing in less pollution intensive services or relatively less
natural resource intensive industries can at best delay the impact of binding
environmental constraints. In the short run these constraints are met through
substitution of clean inputs for dirty ones, increased abatement or new technologies.
However, in the long run, emission intensities must fall towards zero if growth is to
be sustainable. Sustainable growth is often defined as increasing or non-declining
environmental quality and natural resource depletion and continuous growth in per
capita income (Brock and Taylor 2005).
It is clear from the research literature that beyond the basic links between economic
production and environment, the links between economic growth, environment and
climate change are highly complex, multi-dimensional and dynamic, with ecological
as well human-induced (economic, political and social) feedback effects, which are
linked. Simply put, the links are far from straight forward; simple universally valid
answers or truths are few. Despite decades of research there is not always consensus
on how growth and environment are linked and what factors determines what. This is
partly due to lack of adequate data and empirical evidence, and too short time series to
allow robust relationships and credible projections. There is still considerable
scientific uncertainty characterizing the debate, for instance on the functional
relationship between certain air and water pollutants and economic growth, between
climate change and economic growth, and between natural resource exploitation and
economic growth. Some of the literature represents a “growth optimism” with respect
to the impact of growth and environmental quality and attaining environmental
sustainability, whereas others find evidence for “growth pessimism”, i.e. that
economic growth is harming the environment, in the short and/or the long run.
Despite the different perspectives on growth and environment, some general patterns
– which are based on analysis of pollution data covering a couple of decades of
annual measures and a large cross-section of countries in the world – have been
identified: Emissions of health-threatening toxics have declined along with rising
national incomes. Air quality in cities has improved along with increased incomes.
Emissions for regulated pollutants2 have been falling with country income. To
exemplify, data of US emission intensities between 1940-1998 indicate that emissions
per GDP of particulate matter (PM10) fell by 98% over the period, emissions per GDP
of SO2, volatile organic compounds and carbon monoxide fell by around 90% and
NOx emissions fell by 60%. Research studies also indicate that the cost of pollution
2
Sulphur dioxide (SO2), nitrogen oxides (NOx), volatile organic compounds (VOCs), carbon monoxide
(CO), particles (PM10)
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control to attain the current environmental quality levels have been relatively small,
approximately 1-2% of GDP per year for OECD countries (OECD 2003). Grossman
and Krueger (1993, 1995) represent early research which identified that emissions of
some pollutants show an inverted U-shaped (non-linear) relationship with rising
income across time. This relationship has stirred the subsequent debate and empirical
research on the existence of this so called Environmental Kuznets Curve.
Subsequent research has raised some doubts about the existence of Environmental
Kuznets Curves for key pollutants and more generally whether it makes economic
sense to postpone environmental investments until certain growth and income levels
are attained. Important caveats which have been raised in relation to the data and
interpretations raised above are that data showing falling pollution intensities
(pollution per output unit) and reductions in total emissions often mask the fact that
pollution concentrations (in soils, air, water) for some pollutants have increased due
to cumulative effects despite economic growth. Cross-country studies also show that
relationships between economic growth and pollution emissions differ substantially
among countries. For some pollutants and for some countries there is evidence of an
Environmental Kuznets Curve, but its existence locally does not imply that it is
predetermined, predictive or a robust relationship on a larger scale and across time,
and it should not be translated to all forms of environmental pressures. For instance,
generation of solid waste increases in absolute terms with income, in some cases near
linearly, in others exponentially with accelerating waste generation as incomes grow
across time.
Recent research has gone beyond the statistical artefacts which may indicate a certain
functional relationship between growth and environment and showed that several
political economy and governance issues are key determinants to the final outcome
for a certain country’s growth path and environmental quality. Importantly, many
growth-environment relationships have been partly explained by countries’ different
public environmental policy decisions and environmental management regimes
governing production and pollution (Zugravu et al, 2008). Another explanation is
found in the difference in inequality across countries; income inequality produces a
gap between the country’s ability to pay for environmental protection and a country’s
total willingness to pay (Magnani, 2000). For many pollutants the time series data is
rather short (30-40 years) and of varying quality, which contributes to the difficulties
in making any reliable predictions for the future. Fredriksson and Svensson (2003)
have showed the importance of political (in)stability and corruption for environmental
management; political stability has a negative effect on the stringency of
environmental regulations if corruption is low, but a positive effect when corruption is
widespread. They show theoretically and empirically that corruption reduces the
stringency of environmental regulations, but the effect disappears as political
instability increases.
Growth is Bad/Good for the Environment - Scale, Technique and Composition Effects
It is not possible to state a priori whether “growth is bad (or good) for the
environment” without further qualification. First, “environment” has to be defined,
typically according to some pollution-, resource scarcity-/depletion-, or sustainability
measure. Second, the outcome depends on the type and source(s) of growth. Some
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economic growth is based on investments and production, which reduce pollution and
natural resource use. Indeed, other economic activities contribute to produce the
opposite result. Irrespectively, economic growth has been an important indirect driver
of change with multiple evidence of negative impacts on the global environment and
its ecosystems, often caused by increased global trade during the last couple of
decades (Millennium Ecosystem Assessment, 2005). Research on growth and
environment has identified three important effects, which operate as economies grow
and contribute to determine countries’ change in resource use and pollution across
time. They are the scale effect, the technique effect and the composition effect:
The scale effect: The scale effect refers to the scale of economic activity and relates to
the use of natural resources in production and the pollution impacts of production. If
production of goods and services consumes natural resources and produces pollution
as a negative side effect of it, then increasing the scale of the economy will –
everything else equal – increase resource depletion and pollution. Hence, for purely
physical reasons increasing the scale of the economy will degrade the environment.
However, economic growth does not take place in isolation. Growth is dynamic and
responds to new pressures, constraints and opportunities. Hence, growing economies
are not only increasing in scale they also trigger changes in the technology and
composition or structure of the production (Dean, 2002; Brock and Taylor, 2004).
This produces the technique effect and the composition effect.
The technique effect: Economic growth facilitates technological progress in
production of goods and services. This technique effect implies cuts in emissions per
produced unit as well as reduced natural resource (and energy) use per output unit.
Also, increased abatement creates a technique effect in terms of lowering emissions
per unit of output, but may also lower pollution by lowering the growth rate of output.
Early investigations on environmental limits to growth (see e.g. Meadows et al, 1972),
and the impact of growth on environmental quality and natural resources, underestimated this dynamic effect in liberalized, competitive and open economies where
recycling and substitution into new materials represent strong technological feedback
effects, which counter-act the scale effect, reduces pollution intensity and reduces the
need for natural resources as economies grow.
The composition effect: Industrial development across time shows that growing
economies specialize in less pollution intensive goods and services and/or relatively
less natural resource intensive industrial production. Combined with the development
of more pollution intensive production of goods and services in developing countries
this has fuelled research and debate on the “export of dirty production” from rich to
poorer countries. Combined with relatively less strict pollution regulation in
developing countries it has also triggered research on the so called pollution-haven
hypothesis (see section on this below).
Researchers have investigated the net effect of these effects in search for the absolute
and relative contribution of these effects to impacts of growth on environmental
change (resource use and pollution). Behrens et al (2007) show that annual natural
resource consumption of the World economy (i.e. countries’ domestic natural
resource extraction) increased by about one third between 1980 and 2002. This
indicates that the scale effect more than compensated for other effects, such as the
relative increase of the service sectors' contribution to GDP (the composition effect)
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and the use of new production technologies with higher material and energy
efficiency (the technology effect). Over the same time period, the World’s material
intensity (resource extraction per unit of GDP) decreased by about 25%. This result
indicates relative decoupling of resource extraction from economic growth at the
global level. A conclusion from research on growth and environment is that there is
now predetermined “natural” path or functional relationship (e.g between a pollutant
and GDP/capita), which is followed. Environmental policies and management play a
key role as well as countries’ level and quality of governance, corruption and
institutions (Fredriksson and Svensson, 2003; Zugravu et al, 2008; Magnani, 2000)
The Resource Curse Hypothesis: Natural Resource Abundance is Bad for Growth
The Resource Curse hypothesis was first introduced by Auty (1993), who described
how natural resource-rich countries were unable to translate that wealth into enhanced
welfare and poverty reduction, and how these countries had lower economic growth
than countries without natural resource abundance. Sachs and Warner (1995, 2001)
and several other studies have corroborated Auty’s proposition for a large set of
countries based on time series data. To exemplify, from 1965-1998, growth in GDP
per capita decreased on average by 1.3% in the oil-producing countries (OPECmember) countries, while GDP per capita growth was on average 2.2% in the rest of
the developing world during the same period.
The resource curse has been explained to occur due to several reasons, including a
decline in the competitiveness of other economic sectors (caused by appreciation of
the real exchange rate as resource revenues enter an economy), volatility of revenues
from the natural resource sector, government mismanagement, or political corruption
(provoked by large capital inflows from the resource sector). Arguably, an important
determinant is also the large risk of conflict following the quest for natural resources
in countries (Bannon and Collier, 2003; Collier, 2003). Here, natural resource
abundance hampers growth via (risk of) conflict: first, resource abundance can
undermine the quality of governance and economic performances, thereby increasing
the vulnerability of countries to conflicts. Second, conflicts can occur over the control
and exploitation of resources and failed allocation of their revenues. Resource rich
developing countries typically have low savings and investments and relatively high
consumption, which undermines long-term growth.
Mehlum, Moene and Torvik (2006) have qualified the discussion by investigating the
role of institutions. They claim that there is no automatic growth pattern following
resource abundance. They find that resource-rich countries can have slow or high
growth rate, depending on the quality of institutions. Greedy and corrupt institutions
will grab the resource and push aggregate income down, whereas producer friendly
institutions raise income by ensuring public capture of resource rents, long-term
savings and productive investments in other sectors (diversification) and/or countries,
rule of law, government accountability and transparency, and peace.
Recently, Brunnschweiler and Bulte (2008) have questioned the validity of the
traditional resource curse (as outlined by e.g. Auty (1993), and Sachs and Warner
(1995)) by pointing at evidence of opposite links between natural resource abundance,
growth and conflicts. By assuming a different measurement of resource abundance
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they find that knowledge on resource stocks in the ground may be associated with
higher incomes and a lower risk of civil war, and that the opposite result is rather the
exception and not the general pattern.
The Pollution-Haven Hypothesis: Strict Environmental Regulation forces Polluting
Industries to Move out
The pollution-haven hypothesis postulates that highly polluting (“dirty”) industries
migrate from developed economies to developing economies, which have less
stringent environmental legislation. The migration is said to be driven by stronger
environmental concerns in developed economies - which are an effect of higher levels
of income and associated preferences for a cleaner environment – and hence stricter
(enforcement of) environmental regulation. This increases costs of production among
dirty industries which causes them to look for a business environment with more lax
environmental regulations and/or lower production costs. Developing countries may
offer investment opportunities since they typically have lower wages, lower
production costs and less strict environmental regulation and enforcement.
From a developing country perspective it may be beneficial to attract foreign
companies and much needed foreign direct investment (FDI) despite the negative
externalities caused by the migrating industries’ pollution. In principal, offering
“pollution havens” to overseas firms among developing countries in need of income,
employment and foreign exchange may thus seem like a real possibility since it
satisfies the interests of both parties. Offering overseas polluting industries to set up
production in developing countries with lax environmental regulations may in
principle be used by governments as a second-best trade policy when they face
limitations on pursuing trade goals using modern trade policies. So, are proponents of
the pollution-haven hypothesis right and are dirty industries moving out?
Although some theoretical research supports this proposition (see e.g. Chilchilnisky
1994; Copeland and Taylor 1994), empirically there seems to be limited evidence to
confirm this. Key research studies investigation this is issue have not found
statistically significant, robust or consistent evidence which generally support this
hypothesis (Smarzynska-Javorcik and Wei, 2004; Eskeland and Harrison, 2003; Cole
and Elliott, 2003; Quiroga et al 2007). At disaggregated (industry) level there are
some specific examples when this hypothesis has been corroborated (Quiroga et al
2007).
What is clear though from empirical investigations are that toxic pollution per unit of
GDP falls as countries become richer, and composition of output becomes cleaner
across time as countries become richer (Lucas, Wheeler and Hettige 1992). The
poorest countries have the industries with highest toxic releases per output unit.
Although there has been no pollution export in a strict sense (dirty OECD countrybased companies physically migrating to developing countries) two processes have
worked in conjunction: The share of polluting industries has decreased in OECD
countries as environmental legislation in OECD countries has increased during the
last couple of decades, and the size of polluting industries in developing countries
increased has increased over the same time period (Mani and Wheeler, 1997)
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According to Matutinović (2006) current economic growth patterns stimulates
migration of human resources across countries and regions with natural resource
impacts; economic growth in developed and some developing countries maintain high
demand for natural resources and ecosystem services. Degradation of land and local
ecosystems in developing countries fuels international migration of labour from
developing to developed countries. Emigrants tend to increase inequality in the
developed countries which adds to growth and demand for natural resources in the
developing countries. According to Matutinović (2006) this closes a loop between
international labour migration, economic growth and international resource-demand
and -depletion, which may jeopardize sustainable resource use unless targeted
interventions are designed and implemented.
The Porter hypothesis: There is no Trade off between Growth and Environment;
Ambitious Environmental Management will Facilitate Growth
One important strand of research is theoretical and empirical investigations of the so
called Porter hypothesis. It originates from Porter and van der Linde’s (1995) paper
which suggests an alternative interpretation of the environmental and economic
impacts of stringent environmental policies. Points of departure for this research are
the facts that environmental pollution, scarcity and depletion of natural resources and
degradation of ecosystem functions impose certain constraints on economic activity
and prospects for economic growth, and that abatement and mitigation introduces
costs which companies (and in some cases countries) are unwilling to internalize since
they will hamper companies’ profit maximization and jeopardize countries’ efforts to
attain economic growth and poverty reduction. However, according to Porter and van
der Linde, this builds on a static perspective of how companies and countries develop.
Porter and van der Linde propose that stringent environmental policies will induce
and stimulate environmental improvements via innovation, compliance, increased
resource efficiency and development and use of improved technologies. The
technologies will be both more cost-efficient financially for companies, and be more
efficient in their use of natural resources. Companies assuming the costs of
environmental prevention and mitigation will pollute less than other companies and
over time be more competitive compared to more polluting in the same sector within a
country. Likewise, countries which are willing to internalize the costs of
environmental degradation will grow faster and more sustainably. The issue can be
exemplified by generation of waste and toxic or hazardous pollutants, which
constitute constraints on growth by impairing public health and degrading
ecosystems. However, strict environmental policies and increased supply of waste
have also generated employment and income opportunities through development and
export of abatement technologies, dematerialization and profitable recycling of
materials (van den Bergh and Ayres 2005).
At the macro level, countries which pursue tough environmental regulation policies
will facilitate development of companies, which are relatively more competitive at the
international scene. Hence, Porter and van der Linde claim that there is no negative
trade-off between economic growth or environmental sustainability, and that there is
no reason to accept arguments like: economic growth has to be attained and secured
before we can care for (or invest in) the environment. Although some have argued
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against the Porter hypothesis claiming that profit-maximizing companies would do
what environmental regulators require if it were financially profitable and in their
interest otherwise (Palmer et al, 1995). However, at the macro level, the Porter
hypothesis is corroborated by Stern (2006) and the Commission on Growth and
Development (2008) which claim that environmentally sustainable development
cannot or will not be attained without adequate and sufficient internalization of
environmental costs, including the (mitigation and adaptation) costs of climate
change.
Decoupling: Cutting the Links between Environmental degradation and Economic
Growth
One of the future challenges is to maintain economic growth while maintaining or
building up Earth’s natural capital. A strand of the research literature on growth and
the environment focuses on this, i.e. decoupling growth in environmental degradation
from economic growth. The OECD refers to the term decoupling as “breaking the link
between environmental bads and economic goods”. Decoupling occurs when the
growth rate of an environmental pressure grows at a slower or negative rate compared
to its economic driving force (e.g. GDP) over a given period (OECD, 2002). For
example, at national level the growth rate of sulphur dioxide (SO2) may be compared
with the growth rate of GDP. Decoupling arises when the country’s GDP increases
and the country’s SO2 emissions grow at a slower or negative rate.
Fig 1. SOx emissions from energy use versus GDP, 1980-1998
Source: OECD, 2002
There are two types of decoupling: relative and absolute. Relative decoupling implies
that emissions grow slower than the economic growth. Absolute decoupling implies
that emissions decline while the economy grows (Giorgetti, 2007). Some researchers
argue that decoupling is a “natural” process that automatically happens when
economies grow. Others argue that it is political actions that are the main reason for
bringing down emissions and environmental degradation (Azar et al, 2002).
Regarding natural resource extraction it should be noted that the economic growth of
industrialised countries is generally accompanied by a shift from domestic to foreign
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resource extraction (Bringenzu et al, 2004). Economic growth in the industrialised
countries increases while local and regional environmental pressures from domestic
resource extraction are decreasing. This indicates decoupling and yield positive trends
regarding growth and environment. However, in many cases the pressure on the
environment has only moved from one country to another due to composition and
technology effects in production. Decoupling indicators should thus ideally be
interpreted in an international comparative perspective, and be used as a complement
to other analytical approaches.
Regarding global natural resource extraction and economic growth, analyses indicate
decoupling in some respects. Behrens et al (2007) report decoupling between global
material extraction per unit of GDP and global GDP. These findings suggest that the
production of economic output is becoming less material intensive in relative terms
However, the analysis also shows that the overall levels of resource extraction are
increasing in all regions of the world. Specifically, world data on resource extraction
by different material categories indicate a total increase between 1980 to 2002, where
mineral extraction for industry and construction represents the largest relative
increase.
Fig. 2. Global resource extraction by material categories 1980-2002
Source: Behrens et al (2007)
A global comparison across regions (see fig. below) shows that Asia has had the
largest relative (percentage) increase in resource extraction between 1980-2002, as
well as the largest absolute share of all regions. Asia’s per-capita resource extraction
is however much smaller compared to that of Western Europe and North America.
10
Fig 3. Regional shares (%) of global resource extraction 1980-2002
Source: Behrens et al (2007)
Among factors which contribute to decoupling economic growth and environmental
pressures it is shown that technological change plays a crucial role in decoupling
(Mulder et al, 2004). To exemplify, research on the changes in energy-related CO2
emissions from the manufacturing sector of 14 EU countries, shows that decoupling
processes in Ireland, Sweden and France have been accompanied with significant
growth rates in manufacturing (Diakoulaki et al, 2007). Scale effects contribute to
maintain globally high material (resource) extraction.
Economic Growth and Climate Change
Climate change constitutes one of the top challenges facing the world during the next
couple of decades and beyond (Commission on Growth and Development, 2008;
IPCC 2007b; Stern et al, 2006). Developing countries are especially vulnerable
because of their geographic exposure, low incomes, and greater reliance on climate
sensitive sectors such as agriculture. Only a small portion of the cost of climate
change between now and 2050 can be realistically avoided, because of inertia in the
climate system. Poor peoples’ health and agricultural incomes will be under particular
threat from climate change. For instance, falling farm incomes will increase poverty
and reduce the ability of households to invest in e.g. land and deplete any savings to
ensure survival.
Food production will be particularly sensitive to climate change, due to the
dependence of crop yields on climatic factors such as temperature and rainfall.
Agriculture currently accounts for 24% of world output, employs 22% of the global
population, and occupies 40% of the land area. Climate change will have a wide range
of effects on the environment, which could have knock-on consequences for food
production. It is expected that the combined effect of several factors could be very
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damaging. Impacts that are particularly important for future food production are loss
of essential species3, increased incidence of flooding, forest and crop fires, climateinduced outbreaks of pests and diseases, and rising surface ozone.
Partly depending on the impact of carbon fertilisation (due to increased atmospheric
concentrations of carbon dioxide), global cereal production is predicted to decline by
5% for a 2°C rise in temperature and 10% for a 4°C rise. At 4°C increase, entire
regions may be too hot and dry to grow crops. Agricultural collapse across large areas
of the world is possible at even higher temperatures (5 or 6°C) but clear empirical
evidence is still limited (Stern et al, 2006).
Global and Regional Growth Effects of Different Climate Change Scenarios
The links between economic growth (and the prospects for poverty reduction) and
climate change are complex, multi-dimensional and associated with considerable
uncertainities with respect to future events and responses. Nevertheless, researchers
agree that the costs and output effects of climate change are non-linear, with chances
of regional positive effects of slight global warming and risks of future catastrophe
depending on temperature increase and other model assumptions. Most formal models
use 2 - 3°C temperature increase as a starting point. In this temperature range, the cost
of climate change could be equivalent to around a 0 - 3% loss in global GDP from
what could have been achieved in a world without climate change. Poor countries will
suffer higher costs. With 5 - 6°C warming, models including risks of abrupt and largescale climate change estimate a 5 - 10% loss in global GDP, with poor countries
suffering even higher cost (Stern et al, 2006).4 Consumption models linked to the
base-case global warming scenarios estimate that an average annual minimum
reduction in global per-capita consumption of 5%.
Regionally, under a climate-change scenario of 3.9°C temperature increase by year
2100, the mean cost of climate change in India and South East Asia, and in Africa and
the Middle East is predicted to be around 2.5% and 1.9% loss in GDP respectively,
compared with what could have been achieved without climate change. Given strong
correlation between growth and poverty reduction, a climate-driven reduction in GDP
would by 2100 cause an additional 145 million people to live on less than $2 a day in
South Asia and sub-Saharan Africa (Stern et al, 2006). By 2100 at a temperature
increase of 3°C, between 125–275 million additional people may be at risk of hunger
with in Africa and West Asia (Warren et al, 2006). Locally, the poverty and growth
effects may be very high. In Ethiopia, for instance, hydrological variability due to
climate change may cut average annual GDP growth rates by up to 38% and increase
poverty rates by 25% by 2100 (World Bank, 2006). Regarding health impacts, due to
3
Climate change may affect pollinators and hence pollination, which is essential for reproduction of
many wild flowers and crops; its economic value worldwide has been estimated at $30 - 60 billion
(Stern et al, 2006).
4
Accounting for the cost of the negative effects of climate change are difficult due in part because it
will also lead to increases in expenditure, which increase economic output. Examples include defensive
expenditures and investments in e.g. flood and storm protection, and air conditioning. Techniques for
calculating prices and costing non-market impacts (loss of livelihoods) are also problematic
conceptually, practically as well as ethically.
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climate change there could be an additional 165,000 to 250,000 child deaths per year
in South Asia and sub-Saharan Africa by 2100 due to income losses alone.
Models differ on whether low levels of global warming (0-2°C temperature increase)
would have positive or negative global effects. Depending on model assumptions and
inclusion of feedback effects (human mitigation and adaptation responses) it may be
that low global temperature increase is globally beneficial. According to one equityweighted model5 (Tol, 2002), global benefits reach at most +0.5% of global GDP for
a 0.5°C temperature increase (mainly due to increased productivity in e.g. agriculture
and reduced energy costs in OECD countries). For warming beyond 2-3°C, key
climate change models (Tol, 2002; Nordhaus and Boyer 2000) agree that climate
change will reduce global consumption and output. For Africa, Tol (2002) estimates
the cost of climate change to amount to 4.1% of GDP for 2.5°C warming. Similarly,
Nordhaus and Boyer (2000) estimate a cost of 3.9% of GDP for 2.5°C warming.
When global mean temperature rises to high levels (an average of 5°C above preindustrial levels), the chance of large losses in regional GDP in the range of 5 - 20%
begins to appear. For 5°C warming, Nordhaus and Boyer (2000) demonstrate that
giving more weight to impacts in poor regions increases the global cost of climate
change; they estimate that the global cost increases from 6% to 8% of GDP.
Climate change and variability will also have macro-economic fiscal impacts. It will
cut government revenues (from taxes on agricultural and other natural resource based
production) and increase public spending (on mitigation and remedial costs of
extreme weather events), which will worsen countries’ budget situation.
It should be noted that the current cost estimates of climate change do not include
many of the intangible or “hard-to-measure” impacts such as unknown sudden system
change surprises (“ecosystem flips”), threshold effects, some non-market impacts on
human health and the environment - where market prices tend not to exist and current
accounting methods are insufficient or inadequate to identify them - or large-scale,
“second-round” socio-economic responses to the impacts of climate change, such as
conflict, migration and the flight of capital investment. Most models also omit other
potentially important factors, such as social and political instability and cross-sectoral
impacts. Hence, the reported costs should be interpreted as conservative figures and
lower bounds.
Climate Change and Growth: Mitigation and Adaptation, Costs and Benefits
As illustrated below, global CO2 emissions have increased between 1993 and 2002, in
per capita terms and in absolute numbers. Despite economic growth in many countries
over this time period, CO2 emissions have increased in all regions except Europe and
Central Asia. Interestingly, CO2 emissions have increased in the “high income
countries”-group. Taking into account the growth in population, the absolute levels
yield an even higher CO2 emissions growth rate than per capita-measures. These
findings are interesting since early studies of the links between growth and climate
change indicated an “inverse U” relationship between CO2 emissions per capita and
5
Equity-weighted models give more weight to impacts in poorer regions.
13
per-capita income (Schmalensee, Stoker and Judson 1998). This implied implicitly
that increased growth may be a policy option to combat climate change.
However, relying on “economic growth” as the means to combat climate change, is
associated with some risks. First, reduction of CO2 emissions per capita are only
attained at very high per-capita incomes (>55 000US$/cap.). Poor countries will have
to grow (and emit GHGs!) for a long time before they get close to these income
levels. Second, it was only around 20 years ago CO2 were identified as a pollutant, so
explaining emissions reductions - based on very short time series data - as an effect of
rising incomes and the associated increased demand for environmental improvements,
is not convincing (Stern et al 2006). The size of the World’s population of poor
people also constitutes a formidable challenge since increasing per capita incomes of
these people (in order to reduce GHG emissions) is associated with large emissions
increases before emissions (eventually) can go down.
Fig. 4. CO2 emissions per capita, 1990–2003
Source: World Bank and IMF, 2008
Based on the arguments above, the Stern Report (2006) and several other major
research efforts to address climate change (e.g. the Commission on Growth and
Development, 2008) argue that economic growth is an uncertain factor in the combat
against climate change. Hence, deliberate policy interventions and adaptation will be
essential and strong and early mitigation are key means to avoid some of the more
severe impacts that could occur in the second half of this century.
The Stern Report offers a long-run analysis of share of GDP projected to be necessary
to bring down greenhouse gas (GHG) concentrations in the atmosphere and mitigate
climate change. Based on research it states that the expected cost of achieving
emissions reductions, consistent with an emissions trajectory which stabilizes at 1.52°C mean global surface temperature increase by 2050, is likely to be around 1% of
GDP per year. As with all projections of this kind, they are associated with
uncertainty; in this case the uncertainty range is +/- 3%, depending on scale of
mitigation, pace of technological innovation and degree of policy flexibility. In this
context its should be noted that most cost and benefits estimates of mitigation indicate
14
that higher benefit-cost ratios are attained earlier rather than later in the climate
change process, i.e. when GHG concentrations are lower and temperature increases
are lower (Wheeler, 2007). Global costs of climate change will be much higher if
mitigating (and adaptation) efforts are postponed (Stern et al, 2006).
Limiting the global temperature increase to 1.5°C, the global benefit (i.e. the value of
reduced damages) relative to no policies to slow or reverse global warming amounts
to 12.6 trillion US$. As a comparison, limiting the global temperature increase to
3.0°C, the global benefit (value of reduced damages) relative to no policies to slow or
reverse global warming amounts only to 5.9 trillion US$ (Nordhaus, 2007). key
Benefits will be higher Wheeler (2007) proposes a set of measures which may be used
to cost-effectively address climate change in order to maintain economic
development: (i) creating incentives to reduce carbon emissions, (ii) pricing carbon
with increasing carbon charges over time, (iii) lowering the price of clean energy, (iv)
promoting clean energy investments, (v) supporting adaptation to global warming,
(vi) increase public disclosure by establishing an international institution mandated to
collect, verify and publicly disclose information about emissions from all significant
global carbon sources, (vii) establish collaborating global consortia, which will set
objectives and priorities using the best available scientific, technical and economic
assessments.
Indicators of Growth, Environment and Climate Change
It is well known that the key measures of economic growth (GDP, GDP per capita)
fail to account for costs of environmental degradation and depletion of natural
resources. Moreover, they do not fully take into account the economic benefits of
environmental management or improvements of environmental quality, or the
economic contribution to GDP of environmental management or improvements of
environmental quality. GDP also omits accumulation or depreciation of natural capital
(Dasgupta and Mäler 1997). In view of these short-comings many indicators have
been developed which provide information on the links between the economy
(growth, capital, savings etc) and the environment. Below we present a sub-set of this
rather large set of indicators currently available within research and in practical
applications. These are widely used and based on research, and may be used in
assessing growth and environment links. A caveat is that they should be used in light
of the criticism and shortcomings associated with each of them.
Adjusted Net Savings
A key economic measure, which is developed to shed some light on countries’
sustainability is Adjusted Net Savings (ANS). This measure is mainly developed by
Hamilton and Clemens (1999) and used by the World Bank and other international
development cooperation agencies (World Bank and IMF, 2008) to assess of change
(accumulation/depreciation) in countries’ capital savings. Formally, it is linked to
gross savings, which is regularly reported in countries’ National Systems of Account.
However, current measures of gross savings do not include costs of environmental
degradation or costs of natural resource depletion. Adjusted Net Savings adjusts for
these shortcomings and subtracts costs of natural resource depletion for some
15
resources (timber, minerals, oil, natural gas and coal), costs of local air pollution and
CO2 emissions (estimate of global damage cost). Conceptually, it is a very useful
measure, but its usefulness is hampered by exclusion of the costs of some key
environmental issues like soil erosion and land degradation, loss ecosystem services,
over-fishing, over-grazing, increases in water scarcity and water pollution.
Decoupling indicators
Decoupling is an attractive concept since indicators of decoupling typically give a
clear message on growth-environment links; “emissions diminish while GDP
increases” or “emissions rise faster or at the same pace as GDP”. However, the typical
decoupling indicators (e.g. emissions of local/global pollutants and GDP per capita)
lack information on the environment’s capacity to sustain, absorb or resist pressures
posed by the pollution. Cumulative loads or ecological irreversibilities are typically
not accounted for either. Further, cross-border flows of environmental externalities
are not captured in most country-based decoupling indicators (OECD, 2002).
Ecological Footprint
The Ecological footprint (EF)-indicator measures human consumption of the Earth's
ecosystems and natural resources. It enables comparison across individuals and
countries at various geographic scales, either at the global or national level
(Wackernagel et al, 1999; Chambers et al 2000). The measure identifies national
economies’ or individuals’ amount of biologically productive land and sea area
needed to regenerate the resources consumed by a certain population. It also includes
absorption aspects and is based on prevailing technology and current knowledge.
The approach has been criticized on various grounds (see e.g van den Bergh and
Verbruggen, 1999; Grazi et al 2007). Arguments against EF suggest that it is biased
against trade and denies the benefits of trade, that it rewards replacement of original
ecosystems for high-productivity agricultural monocultures by assigning a higher
biocapacity to such regions, bias against ecological farming (following the same
reasoning), bias against densely populated areas or countries because these
communities have little intrinsic biocapacity, and instead must rely upon other
countries’ or regions’ natural capital. Since it is a measure focusing on consumption
the links to economic growth (sum of production of goods and services) are not very
clear. Nevertheless, statistically EF and economic growth (GDP; GDP/capita) are very
closely (and positively) correlated in a cross-country comparison.
16
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21