Since 1991, when economists first reported a systematic relationship between income changes and environmental quality, this relationship, known as the Environmental Kuznets Curve (EKC), has become standard fare in technical conversations about environmental policy (Grossman and Krueger 1991). When first unveiled, EKCs revealed a surprising outcome: Some important indicators of environmental quality such as the levels of sulfur dioxide and particulates in the air actually improved as incomes and levels of consumption went up.
Prior to the advent of EKCs, many well-informed people believed that richer economies damaged and even destroyed their natural resource endowments at a faster pace than poorer ones. They thought that environmental quality could only be achieved by escaping the clutches of industrialization and the desire for higher incomes. The EKC’s paradoxical relationship cast doubt on this assumption.
We now know far more about the linkages between an economy and its environment than we did before 1991. This primer shares this knowledge.
There is no single EKC relationship that fits all pollutants for all places and times. There are families of relationships, and in many cases the inverted-U Environmental Kuznets Curve is the best way to approximate the link between environmental change and income growth. The indicators for which the EKC relationship seems most plausible are local air pollutants such as oxides of nitrogen, sulfur dioxide, and particulate matter.
The EKC evidence for water pollution is mixed, but there may be an inverted U-shaped curve for biological oxygen demand (BOD), chemical oxygen demand (COD), nitrates, and some heavy metals (arsenic and cadmium). In most cases, the income threshold for improving water quality is much lower than the air pollution improvement threshold.
The acceptance of the EKC hypothesis for select pollutants has important policy implications. It implies that some environmental degradation along a country’s development path is inevitable, especially during the take-off process of industrialization. Second, it suggests that when a certain level of per capita income is reached, economic growth helps to undo the damage done in earlier years. If economic growth is good for the environment, policies that stimulate growth (trade liberalization, economic restructuring, and price reform) should be good for the environment.
However, income growth without institutional reform is not likely to be enough. Improvement of the environment with income growth is not automatic but depends on policies and institutions. GDP growth creates the conditions for environmental improvement by raising the demand for improved environmental quality and makes the resources available for supplying it. Whether environmental quality improvements materialize or not, when, and how, depend critically on government policies, social institutions, and the completeness and functioning of markets.
Better policies, such as the removal of distorting subsidies, the introduction of more secure property rights over resources, and the imposition of pollution taxes to connect actions taken to prices paid will flatten the underlying EKC and perhaps achieve an earlier turning point. The effects of market-based policies on environmental quality are expected to be unambiguously positive.