Trade, Growth and the Environment

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Trade, Growth and the Environment

• SCSE ASDEQ Meeting
• Quebec City, May 17
• M. Scott Taylor
• Department of Economics, University of Calgary
• National Bureau of Economic Research, Cambridge MA

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What are the Issues?

• Is continuing economic growth compatible with an
  improving environment?
• What determines cross country differences in
  environmental quality?
• Does international trade shift dirty pollution
  industries to less developed countries?

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The Growth Dilemma

• Continual growth with environmental improvement
  requires falling emissions per unit of output.
• But lowering emissions per unit of output comes
  at increasing cost, because of Diminishing
  Returns.

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Implication

• Pollution abatement costs should rise as
  emissions per unit of output fall.
• Higher costs must lower the return to investment
• This slows or even chokes off growth.

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A Potential Solution

• Technological progress holds abatement costs down
• The return to capital accumulation is not choked
  off
• Growth with environmental improvement is possible

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Is it possible?

• Maybe but what would it require?
• Is there any evidence that it has occurred for
  any pollutant in any country?
• What does this evidence tell us about our future
  with carbon regulation?

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The Solow Model

• One Aggregate Good produced via capital equipment
  and labor
• Aggregate output can be consumed or invested
• Capital accumulates over time via investment
• Technological progress makes inputs to goods
  production more efficient over time.

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Rewrite in Different Units
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The Solow Model
f(k)
y
sf(k)
i
Output Savings Investment
(ngd)k
k(0)
k
Capital per effective worker
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BGP Predictions

• k is constant along the BGP, but this means
• Capital per worker, K/L grows at rate g
• Income per capita Y/L grows at rate g
• Aggregate output grows at rate gn
• Technological progress determines an economys
  long run growth.

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Transition Path Predictions
Rates of Change
(ngd)
sf(k)/k
k(0)
k
Capital per effective worker
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Unconditional ConvergencePoor Countries Should
grow faster than Rich ones
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Transition Path Predictions
Rates of Change
(ngd)
(ngd)
sf(k)/k
sf(k)/k
k
k
Capital per effective worker
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Conditional ConvergenceCorrect for SS differences
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Summary

• Technological Progress is key to growth
• Two time periods transition and balanced growth.
  
• Convergence in incomes per capita, after
  conditioning on country characteristics.

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The Green Solow Model

• Technological progress makes inputs used in both
  goods production and abatement more efficient
  over time.
• Environmental standards rise slowly over time

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Emissions can be abated but at some cost. ?F is
Abatement costs ? is Abatement costs/GDP
Emissions produced are proportionate to output
flow
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Manipulate to Obtain
Emissions Growth along BGP Defined as GEgn-gA
Transitional Growth Component
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Two Time Frames

• Along the BGP we have dk/dt 0
• Emissions fall or rise over time
• If GE gt 0 we say growth is unsustainable
• If GElt 0 we say growth is sustainable

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Sustainable Growth GE lt0
Rates of Change
dE/dt/E
dk/dt/k
a(ngd)-GE
a(ngd)
asf(k)/k
kT
k
Capital per effective worker
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Empirical ImplicationsWhen Growth is Sustainable

• The Environmental Kuznets Curve Pollution
  emissions should at first rise with development
  and then fall
• Pollution Abatement costs should rise, but as a
  fraction of output are constant.
• Emissions per unit of output fall continuously.

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US Evidence
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Declining Emissions to GDP ratios
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Pollution Abatement costs/GDP are virtually
constant
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Sulfur Dioxide Emissions, 1940-1998
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Nitrogen Oxide Emissions, 1940-1998
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Volatile Organic Compounds 1940-1998
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Particulate Matter PM10, 1940-1998
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Carbon Monoxide Emissions, 1940-1998
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International Evidence
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For key local pollutants

• Growth and environmental improvement can
  co-exist.
• Regulations tightened but costs did not
  skyrocket.
• Some evidence it was technological progress in
  abatement.

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Should we be Optimistic?

• What about Trade?
• What about Unsustainable paths like the one for
  Carbon?

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What about Trade?

• Maybe the reduction in US pollution levels is
  matched by increases elsewhere as dirty
  industries migrate to less developed countries?
• What looks like success is really failure to
  address the problem.

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Perhaps, but

• Pollution abatement costs are a small fraction of
  output for all OECD countries suggesting that
  other determinants of location could be
  important.

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Pollution Abatement Costs as a Share of GDP
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• Except for very natural resource intensive
  industries, the developed world dominates dirty
  good exports.

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Ten Largest Exporters of Environmentally Dirty
Goods in 1988
Source Low et al. (1992, p95)
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What about Unsustainable Growth

• Pollution emissions should rise rapidly with
  development and grow more slowly thereafter.
• Emissions per unit of output may fall, but just
  not fast enough.
• Carbon is a prime example.

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UnSustainable Growth GEgt0
Rates of Change
dE/dt/E
a(ngd)
a(ngd)-GE
asf(k)/k
k
kT
Capital per effective worker
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Transition Path Predictions
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Unconditional Convergence
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Conditional Convergence
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Summing Up
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Local Pollutants

• US and International evidence suggests that
  growth and environmental improvement is possible,
  but not inevitable.
• Environmental improvement came at relatively low
  costs (1 to 2 of GDP)
• Green Solow model attributes this success to
  technological progress in abatement holding down
  the costs of slowly rising environmental
  standards.

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Trades Role

• Fears of lost competitiveness from pollution
  regulation are over blown.
• Industry location depends on many more factors
  than just environmental regulation.
• Rich developed countries are the big dirty good
  producers and exporters.

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• What is our Carbon future?
• Convergence in emissions per capita across
  countries is likely even absent active
  regulation.
• BUT with real economic growth of 3 per year,
  Canadas historic emission intensity reductions
  of 1.5 2/year have to at least double in the
  long run.
• Rates of reduction far in excess of 3/yr have
  been achieved by other countries, for other
  pollutants, and for only small costs.
• Sustainability is not only possible, it is
  probably quite cheap.

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Additional Reading

• Werner Antweiler Brian R. Copeland M. Scott
  Taylor, Is Free Trade Good for the Environment,
  The American Economic Review, Vol. 91, No. 4,
  Sep. 2001, pp. 877-908.
• James A. Brander M. Scott Taylor, The Simple
  Economics of Easter Island a Ricardo-Malthus
  Model of Renewable Resource Use, American
  Economic Review, Vol. 88, No. 1, March 1997, pp.
  119-138.
• William Brock M. Scott Taylor, Economic Growth
  and the Environment A Review of theory and
  empirics, forthcoming in the Handbook of
  Economic Growth, S. Durlauf and P. Aghion eds.
• William A. Brock M. Scott Taylor, The Green
  Solow Model, NBER working paper No. 10557, June
  2004.
• Brian Copeland M. Scott Taylor, Trade, Growth
  and the Environment, Journal of Economic
  Literature, Vol. 42, No. 1, March 2004, pp. 7-71.