NOTA DI LAVORO Economic Growth and the Environment with Clean and Dirty Consumption

Transcription

1 NOTA DI LAVORO Economic Growt and te Environment wit Clean and Dirty Consumption By Carlo Oreccia, University of Rome II Tor Vergata, Italy Maria Elisabetta Tessitore, University of Rome II Tor Vergata, Italy

2 Climate Cange and Sustainable Development Series Editor: Carlo Carraro Economic Growt and te Environment wit Clean and Dirty Consumption By Carlo Oreccia, University of Rome II Tor Vergata, Italy Maria Elisabetta Tessitore, University of Rome II Tor Vergata, Italy Summary Tis paper aims to verify te existence of te Environmental Kuznets Curve (EKC) or inverted U-saped relationsip between economic growt and environmental degradation in te context of endogenous growt. An important feature of tis study is tat te EKC is examined in te presence of pollution as a by product of consumption activities; also, pollution is a stock variable rater tan a flow and tends to accumulate over time. In order to igligt te role of consumption on te environment, consumers do not consider directly pollution in te maximization problem and are assumed to coose between two different consumption types, caracterized by a different impact on te environment (i.e. dirty and clean consumption). We find tat substitution of dirty consumption wit clean consumption alone is not sufficient to reduce environmental pollution. Te result depends on te product differentiation and te cost to acieve it. From a social welfare perspective, more environmental awareness is unambiguously desirable wen it generates less pollution. However, it could be tat more environmental awareness leads to a lower level of social welfare depending on te costs of product differentiation and social marginal damage of pollution. Keywords: Environmental Kuznets Curve, Economic Growt, Pollution, Consumption, Consumption beaviour JEL Classification: C61, Q56, O44 Tis paper as been presented at te 18t Annual Conference of te European Association of Environmental and Resource Economists (EAERE 2011), eld on te campus of te University of Rome Tor Vergata, June 29t to July 2nd. Address for correspondence: Carlo Oreccia Department of Economics University of Rome II Tor Vergata Via Columbia Rome Italy carlo.oreccia@uniroma2.it Te opinions expressed in tis paper do not necessarily reflect te position of Fondazione Eni Enrico Mattei Corso Magenta, 63, Milano (I), web site: working.papers@feem.it

3 Economic growt and te environment wit clean and dirty consumption Carlo Oreccia Maria Elisabetta Tessitore University of Rome II Tor Vergata Abstract Tis paper aims to verify te existence of te Environmental Kuznets Curve (EKC) or inverted U-saped relationsip between economic growt and environmental degradation in te context of endogenous growt. An important feature of tis study is tat te EKC is examined in te presence of pollution as a byproduct of consumption activities; also, pollution is a stock variable rater tan a flow and tends to accumulate over time. In order to igligt te role of consumption on te environment, consumers do not consider directly pollution in te maximization problem and are assumed to coose between two different consumption types, caracterized by a different impact on te environment (i.e. dirty and clean consumption). We find tat substitution of dirty consumption wit clean consumption alone is not sufficient to reduce environmental pollution. Te result depends on te product differentiation and te cost to acieve it. From a social welfare perspective, more environmental awareness is unambiguously desirable wen it generates less pollution. However, it could be tat more environmental awareness leads to a lower level of social welfare depending on te costs of product differentiation and social marginal damage of pollution. Keywords: Environmental Kuznets Curve, Economic Growt, Pollution, Consumption, Consumption beaviour JEL codes: C61, Q56, O44 Tis paper as been presented at te 18t Annual Conference of te European Association of Environmental and Resource Economists (EAERE 2011), eld on te campus of te University of Rome Tor Vergata, June 29t to July 2nd. Corresponding autor: University of Rome II Tor Vergata. carlo.oreccia@uniroma2.it 1

4 1 Introduction Te Environmental Kuznets Curve (EKC) ypotesis states tat tere is an inverted U-saped relationsip between environmental degradation and economic growt. Since te seminal contribution of Grossman and Krueger (1993), tis pattern as been intensively debated in empirical terms (recent reviews are provided by Dinda 2004 or Dasgupta et al. 2002). Te EKC as also captured large attention from policymakers and teorists. To some extent, tis is due to te fact tat te EKC ypotesis implies tat pollution diminises once a critical tresold level of income is reaced. As a consequence, economic growt is a pre-condition for environmental improvement. Tus, one of te main questions we ave to address using growt teory is weter te EKC occurs automatically in te course of economic growt or weter environmental policy plays a crucial role in causing te downturn of te EKC. Teoretical models ave been employed to explain te EKC; eac of tese explanations yields a different policy implication. First, demand for better environment increases wit income. One of te reasons is te fact tat people fear of incurring in irreversible damage. Provided tat relatively advanced political institutions exist, iger demand for environmental quality causes increasingly stricter environmental regulations. Tis is actually te conclusion from several teoretical models tat assume perfect internalization of external effects. Internalization can cause tecnological progress to move in an environmentally friendly direction. For example, te policy-induced introduction of end-of-pipe tecnologies as been important for te reductions in several air pollutants. Tis is corroborated by decomposition analyzes, wic sow tat canging tecnologies ave been crucial for te downturn of te EKC. However, wen appropriate policies are absent, tecnological progress may well be pollutionenancing. Smulders and Bretscger (2000) propose tat pollution increases after introduction of a new tecnology, tat after pollution as raised public concern a tax is imposed, and tat tis tax induces te invention of a clean tecnology tat allows te downturn of te EKC. However, it may later transpire tat a substance emitted by te clean tecnology is also polluting. Tis opens up te possibility of cycles. Tese cycles imply tat one pollutant is substituted for by anoter. A regulated flow or local pollutant could be replaced by a stock or global pollutant wic is not subject to regulation. In fact, end-of-pipe tecnologies ave precisely tis effect. Nuclear power as also replaced energy gained from fossil fuels. Anoter explanation is related to te cange in te structure of te economy. Structural cange can explain te rising branc of te EKC in poor countries, but to cause te downturn te absolute production level of an industry must srink. Tis is only plausible wen dirty industries migrate from developed into developing countries. Te evidence suggests tat structural cange alone cannot explain te EKC. Terefore te migration of dirty industries is usually not so rapid tat te absolute level of production of tese industries will decline considerably in developed countries. Neverteless, dirty industries can grow fast in developing countries. Hence, wile te migration of dirty industries may explain te cross country EKC, it cannot explain te EKC of a single growing developed country over time. Migration causes serious problems as soon as te developing countries attempt to lower pollution because tey cannot relocate pollution but must actually reduce it. It as also been sown tat te cross country EKC sifts upward wit economic growt wen te EKC is based on migration. Terefore a country on te falling branc of te cross country EKC may well see its pollution rise in te course of economic growt due to tis upward sift of te EKC. Finally, increasing returns to scale in abatement can allow ric countries to abate at lower average costs tan poor countries. Tis may bring about te EKC. By contrast to many of tese prior explanations, following te tradition of one-sector endogenous growt models, we developed a simple dynamic model of economic growt and pollution. Tis analysis advances beyond previous work in tree respects. First, as te purpose of tis 2

5 paper is to igligt te role of consumption on te environment, pollution is modeled as a by-product of consumption instead of production activities. Consumption as a direct impact on te environment: iger levels of consumption require larger inputs of energy and material and generate larger quantities of waste byproducts. Consumption as also an indirect impact on te environment: consumers beaviors and consumption decisions form an important part of production-consumption cain as it is te consumer wo makes te final coice about wic goods and services e consumes. Wen we tink of daily activities tat cause pollution we tend to tink of driving, eating or wasing. But a larger impact of individuals is troug te products tat tey buy. Ultimately, it is consumers (including companies and government) buying products tat trigger te cain of events tat leads to most pollution. If you buy a television set, you sare responsibility for te energy used by te sop and for te transport of te TV set from its country of assembly. In most teoretical macroeconomic models, consumption is treated as a omogeneous good. Usually tis ypotesis can be accepted as a plausible simplification witout relevant consequences on te generality of te model s findings. However, sometimes commodity eterogeneity turns out to be important in representing particular economic penomena. An example is given by te case of goods wic give place to different effects on te environment; in tis case, building up models allowing for different kinds of commodities is relevant; in particular, te distribution between clean and dirty goods affects pollution and tereby welfare, economic activity etc. Commodities can be defined as clean or dirty according to te environmental impact connected to teir production and/or consumption. Consider for instance te consumer coice of urban transportation (i.e. car, bus, train etc.); besides te polluting effects due to te production of eac of tese goods, tere is an additional and different impact on te environment for eac kilometer run by car, by bus or by train 1 Second, te model is distinctive also in representing pollution as a stock and not only as a flow variable. Pollution degrades environmental quality wic can be restored only after te passage of some period of time - sorter for some pollutants tan oters. For example, sulfur dioxide emissions are less important for teir effects on air concentrations tan for teir enduring effects on soil cemistry, forest stocks, lake cemistry, and aquatic biodiversity. Persistent effects on environmental quality also result from clorofluorocarbons (CFCs) and many oter industrial pollutants. Terefore, tis paper analyzed te state of te environment caracterized as a stock tat can cange as a result of emissions on one and and corrective consumption decisions on te oter. In tis respect, it is also important to stress te fact tat consumers do not always observe pollution per se but rater its impact on te environment; sometimes, even te effect of pollution 1 Several examples of clean consumpion can be provided: (i) green electricity, produced from renewable energy; (ii) food or beverages packaged in ecologically favorable material like PET or multi-way bottles or cardboard containers, instead of cans or one-way bottles; (iii) eco-detergents containing lemon or acetic acid, instead of aggressive detergents. Te same olds for wasing powder. Te reason is tat water purification becomes less expensive, te less pollutants reac te groundwater or te water recycling plant; (iv) food from eco-farmers wo do not use mineral and cemical fertilizers and pesticides wic pollute te groundwater; or (v) paper recovered from waste paper instead of paper produced from trees. Clean consumption also means tat a consumer will pay attention to: (i) te origin of juice, bottleddrinking water and wine, because te environment will not be burdened by long-distance transport if tose products come from a neigboring area; (ii) te justifieded keeping of animals. He prefers meat and eggs produced under suc conditions, altoug products from mass production in agriculture, combined wit negative environmental externalities, are frequently less expensive tan regional farm products; (iii) not buying less expensive electronic entertainment equipment, tat are inefficient in terms of energy consumed. 3

6 on te environment is not observable immediately. Tis is true if we tink, for instance, to te depletion of te ozone layer; and it is also true if we tink about climate cange (wic is a long-term cange wose effects on te environment are, fortunately, not fully evident yet). On te one and, te flow pollutant as an immediate on te environment. On te oter and, te stock pollutant arms te environment only in te future since stock pollutants frequently need time to accumulate before te damage occurs. For all tese reasons, we analyze a growt model distinguising between two types of consumption, an environmentally friendly clean consumption tat abates pollution and a dirty consumption tat generates pollution. We are interested in analyzing te welfare and environmental effects wen te population of green consumers increases. In our model, environmental consciousness is measured by te size of green consumption compared to tat of dirty consumption. Intuitively, we sould expect a greener environment (less emissions) as environmental consciousness grows. We sow tat intuition can be misleading. We find te counterintuitive result tat pollution can be iger as te proportion of green consumers increases. Te result depends on te degree of product differentiation (consumers valuation of te pysical and environmental attributes) and ow costly it is to produce te good wit te environmental attribute. Wen te proportion of green consumers is low, bot firms compete for very few consumers as dirty consumers do not care for te environmental attributes and always buy from te firm tat uses te dirty tecnology. Product differentiation becomes less important and te advantage in costs makes te dirty firm carge a low price and capture almost te wole market. A marginal increase in te population of green consumers makes competition touger and bot firms reduce teir prices. Altoug te clean firm sells more, te difference in costs makes te dirty firm carge a very low price and its output increases. Tis effect is reversed wen te proportion of green consumers is sufficiently ig. Once a critical value is reaced, furter increases in te population of green consumers reduce te dirty firms output as product differentiation becomes more important. In tis model, te utility function of te representative agent does not depend directly on pollution but only indirectly troug te consumption decisions. In oter words, in tis model, pollution per se does not create disutility. We can tink in tis case of a social planner tat takes into account te environmental problem only troug te pollution constraint because consumers do not consider te stock pollution directly in teir utility function but only indirectly troug consumption decisions. Tird, focusing on te social planner s problem, we derived closed-form solutions for te resulting dynamic system. Tis enabled us to determine ow pollution evolves over time and identify te economic determinants beind its pat. 2 Dynamic growt model wit stock pollution Using te paper of Andreoni and Levinson (2001) as a starting point, we extend teir model in a dynamic context in wic pollution is treated as a stock variable rater tan as a pure flow and pollution is a result of consumption activity. As pointed out in te introduction, it is more reasonable to assume as a stock some environmental degradation (suc as eavy metals, deforestation and te depletion of te ozone layer) because tese pollutants are cumulative and self decaying very slowly. In particular, we assume a competitive economy wic is closed to international markets and is populated by identical and infinitely lived agents. Te production tecnology is given by Y (t) = AK(t) (1) 4

7 were Y denotes aggregate output and K te aggregate capital stock at time t. Te positive constant A is assumed to be sufficiently large to enable positive growt of output, as analyzed later.te absence of diminising returns to capital may seem unrealistic but te idea becomes more plausible if we tink of K in a broad sense to include uman and natural capital, knowledge, infrastructures and so on. In tis economy, tere are two different ways of consuming tis aggregate good: a dirty consumption tat generates waste and, as a consequence, damages te environment and a clean consumption, tat mitigate te environmental impact of products purcased and reduce pollution. Utility of te representative agent positively depends on te two types of consumption. Moreover, utility does not depends directly on te pollution stock. Te reason is tat consumers do not observe pollution per se but rater its impact on te environment. Since many pollutants tend to accumulate over time (e.g. CO 2 emissions) and to ave a visible impact on te environment only wen tey reac a certain level, tis may not be unrealistic. Up to tat level, pollution does not affect uman activity. Usually, te effect of pollution on te environment may last long after te pollution itself is gone. Tis does not mean tat agents do not care about te environment or do not ave environmental and ecological concerns. On te contrary, tey do take into account te environment troug te consumption beavior. In every instant of time t, tey decide wic type of consumption prevails (weter it is te dirty or te clean consumption). In tis sense, a way to reduce environmental impacts of consumer expenditure is troug te encouragement of more sustainable consumption patterns. Society s environmental awareness and education play a significant role in a ouseold s decision making process. Tus, a representative agent maximizes te following utility function over an infinite orizon, U = U[D, C] (U D > 0, U C > 0, U DD < 0, U CC < 0) (2) were D is te level of dirty consumption and C is te clean consumption. D and C generate utility in te same way, bot aving positive and diminising marginal utility, as conventionally assumed. 3 Social optimum In tis section we consider te social planner s problem and caracterize te economy. We derive te time pat of pollution and verify te existence of te Environmental Kuznets Curve. Te dynamic maximization problem may be expressed as follows: max U[D(t), C(t)]e ρt dt D,C 0 s.t. { K(t) = F [K(t)] δk(t) zd(t) C(t) K(0) = K 0 0 P (t) = αd(t) βc(t) γp (t) P (0) = P 0 0 were, D(t) > 0 and C(t) > 0. In tis model, D is dirty consumption, C is clean consumption, K is te capital stock for production, P is te pollution stock, F [K] is te production function of output, ρ is te discount rate of time preference and δ is te depreciation rate of te capital stock; z and are positive parameters tat measure te different cost for society of two types of consumption. Consumption D and C, are control variables. 5

8 To caracterize te transitional growt pat and te optimal solutions of te above problem, we assume tat te utility function, production function and pollution function ave te following functional forms U[D, C] = ln(d σ C θ ) (3) F [K] = AK (4) K(t) = AK(t) δk(t) zd(t) C(t) (5) P (t) = αd(t) βc(t) γp (t) (6) Pollution is a function of bot types of consumption, D and C and tends to accumulate over time. Pollution is proportional to te amount of dirty consumption D (i.e. an increase in tis consumption determines an increase in pollution, wit α being a measure of pollution intensity); on te contrary, pollution is inversely proportional to eco-friendly consumption C (i.e. an increase in tis consumption abates pollution in a proportion equal to β). Finally, te pollution stock is subject to exponential decay at te rate γ > 0. Parameters σ and θ stand for te elasticities of te utility function of two types of consumption D and C. Tey measure te responsiveness of te agent s utility to a cange in te level of two types of consumption. So σ and θ can be considered as a measure of a consumer s environmental awareness and concern. Te Hamiltonian function H reads as follows: H = ln(d σ C θ ) + λ[ak δk zd C] + φ[αd βc γp ] (7) and te necessary FOC are: H D = σ zλ + αφ = 0 (8) D H C = θ λ βφ = 0 (9) C λ(t) = (A δ ρ)λ(t) (10) φ(t) = (γ + ρ)φ(t) (11) lim t {K(t)λ(t)e ρt } = 0 (12) lim {P t (t)φ(t)e ρt } = 0 (13) were λ is te co-state variable wit respect to capital stock K and φ te co-state variable wit respect to pollution stock P. Since λ denotes te sadow price of a valuable resource, from an economic point of view, it sould ave a positive sign wile te sadow price of pollution φ sould be non-negative as it will be sown later. Interpreted economically, equations (8) and (9) state tat te effect on utility of bot dirty and clean consumption sould be equated to te sadow value of capital K, measured by λ, adjusted for te sadow price of pollution via te αφ term. 6

9 Conditions (8) and (9) sow ow te central planner determines te optimal distribution of consumption between clean and dirty goods by simply equalizing teir marginal utilities. If te planner does not care for te environment, i.e. φ = 0 and te cost for society of dirty and clean consumption is te same, i.e. z =, we ave U D = U C. However, if φ is different from zero, marginal utility of dirty goods must include te additional (negative) term αφ and marginal utility of clean consumption must include te additional (positive) term βφ. Tis means tat in order to restore te equivalence between te marginal rate of substitution and price ratio, U C needs to decrease (and U D needs to increase), i.e. clean (dirty) consumption must rise (fall). From (10) and (11) we ave: λ(t) = λ 0 e (A δ ρ)t (14) and From (8) and (9), using (14) and (15), we ave: D(t) = C(t) = σ zλ(t) αφ(t) = θ λ(t) + βφ(t) = φ(t) = φ 0 e (γ+ρ)t. (15) σ zλ 0 e (A δ ρ)t αφ 0 e (γ+ρ)t (16) θ λ 0 e (A δ ρ)t. (17) + βφ 0 e (γ+ρ)t From (16) and (17) we see tat if φ 0 is positive (or negative) D(t) (or C(t)), as t grows, sooner or later will become negative. Since we are assuming a consumption greater tan zero, we must conclude tat φ 0 is zero; tis implies tat φ(t) also is always zero and tat λ(t) > 0 must old. Equation (8) and (9) sow tat along te optimal growt pat, marginal utility of dirty and clean consumption must equal te sadow price of capital λ adjusted for te sadow value of pollution φ. Terefore we ave tat and D(t) = D 0 e (A δ ρ)t (18) C(t) = C 0 e (A δ ρ)t. (19) Since te sadow value of pollution is zero, te steady state level of capital (or te long-run growt rate) is independent of te social planner s concern about pollution. Te steady state requires Ḋ = Ċ = 0 implying tat A = δ + ρ. Hence, te level of capital wic satisfies tis condition is te same as te one resulting from te underlying growt model witout pollution. Next, considering an endogenous growt framework leading to sustained growt (i.e. A δ ρ > 0) implies tat Ḋ D, Ċ C > 0. From equation (5), after dividing by K, we get zd(t) K(t) + C(t) K(t) = (A δ) K(t) K(t) (20) In te steady state (were, by definition all variables grow at constant rates) te growt rate of capital is constant. Terefore, te rigt and side of te above expression is constant. Consequently, zd+c K is constant, and te growt rate of capital (and ence, te te growt rate of output, Y ) equals te growt rate of consumption D and C given by equations (18) and (19). 7

10 To compute te growt rate of capital outside te steady state, we substitute D into (5) and, solving te linear differential equation and recalling (12), we get: were D(0) = D 0 and C(0) = C 0 are suc tat K(t) = K 0 e (A δ ρ)t (21) Using equations (8) and (9) we ave: zd 0 + C 0 ρ = K 0 (22) Hence, zd(t) + C(t) = σ + θ λ(t) λ 0 = σ + θ = σ + θ zd 0 + C 0 K 0 ρ Terefore, substituting λ 0 into (14), we can write: Since φ(t) = 0, recalling (8) and (9), we obtain λ(t) = σ + θ K 0 ρ e (A δ ρ)t (23) D(t) = C(t) = σk 0ρ z(σ + θ) e(a δ ρ)t (24) θk 0ρ (σ + θ) e(a δ ρ)t (25) It is wort noting te relationsip between te two types of consumption: C D = θz σ (26) Consumers substitute clean consumption wit dirty consumption depending on te ratio θz σ. Clean consumption increases if its marginal utility θ increases and if its cost () is lower tan tat of dirty consuption (z). To compute te growt rate of pollution, we substitute D and C into (6) and, solving te linear differential equation in P, we get: were I = P (t) = K 0 ρ (σ+θ)(a δ ρ+γ) 4 Analytical results [ ( ασ P 0 I z βθ )] ( ασ e γt + I z βθ ) e (A δ ρ)t (27) Equation (27) describes ow pollution evolves over time. Te first term of te equation measures te natural decay or assimilative capacity of te environment. Te second part, is pollution due to uman consumption activity. 8

11 From (21) we know tat A > ρ + δ is a necessary condition for sustained growt in te absence of environmental considerations. Tis also implies A + γ > ρ + δ since γ is a positive number. Tus, we can conclude tat A δ ρ + γ > 0. From (24) and (25), we see tat (σ+θ) 0 must old in order to ave a positive consumption. Since K 0, ρ, and z are also positive parameters, I in equation (27) is always positive and te sign of (27) only depends on te difference ( ασ z Tus, te evolution of P depends on te interaction of tree types of variables: te elasticity of substitution between clean and dirty consumption (measured by σ and θ); te pollution/abatement intensity of two types of consumption (measured by α and β); te cost for te economy of two consumption categories (measured by z and ). In wat follows, we will evaluate te pollution pattern over time and we will verify te existence of an EKC. βθ ). 4.1 Te time pat of pollution P wen ασ z > βθ In tis case, pollution stock initially decelerates due to te regeneration capacity of nature. As uman dirty consumption activity grows, pollution rises exponentially. As we can see in figure 1, we ave a U-saped relationsip were pollution initially decreases and, after a period of time, inverts tis relationsip and it starts to increase. Te case wen α and σ are bot greater tan β and θ and z < is straigtforward since we can expect tat pollution increases if proportion of dirty consumption exceeds tat of clean consumption (σ > θ), pollution intensity of dirty consumption is greater tan abatement intensity of clean consumption (α > β) and costs for society of clean consumption () are greater tan tose of dirty consumption (z); tus it is more interesting to look at tree extreme cases: a) σ > θ, α < β and z = ; b) σ < θ, α > β and z = ; c) σ < θ, α < β and z <. In wat follows, te underlying baseline set of parameters used to illustrate te evolution of P, is in line wit usual growt model calibrations (e.g. Ortigueira and Santos, 1997). To analyze te different cases, only relevant parameters (i.e. σ and θ, α and β, z and ) cange case a) σ > θ, α < β and z = In tis case, even if abatement intensity of clean consumption β is greater tan pollution intensity of dirty consumption α, σ is large enoug to guarantee tat te product ασ is greater tan βθ. Since σ and θ are a measure of te elasticity of substitution between clean and dirty consumption, a greater value of σ wit respect to θ means tat a given amount of dirty consumption causes more utility and individuals will accordingly spend more on it. As a result, pollution will increase over time. An illustration of te time pat of pollution is given in figure 1, were a simulation as been carried out using parameters in table 1. P 0 K 0 α β σ θ γ ρ A δ z Table 1: Baseline parameters for case a). 9

12 4.1.2 case b) σ < θ, α > β and z = Figure 1: Case a) In tis case, society prefers clean to dirty consumption (since σ < θ); a small amount of clean consumption gives society a sligt gain in utility. However, tis positive effect is offset by te fact dirty consumption as a very damaging impact on te environment troug te parameter α. Te net effect is a sort of U-saped relationsip were pollution initially decreases and ten starts to increase (see figure 2). Figure 2: Case b) P 0 K 0 α β σ θ γ ρ A δ z Table 2: Baseline parameters for case b) case c) σ < θ, α < β and z < In tis case, it is te different cost for te economy of te two types of consumption tat matters. In figure 3, we can see tat, pollution initially decreases, tends to zero and ten starts to increase 10

13 as it does in te oter cases but after a longer period of time. After less tan 50 years, pollution tends to zero and remains zero for 150 years and ten starts to increase. Te wole story takes around 200 years. Figure 3: Case c) P 0 K 0 α β σ θ γ ρ A δ z Table 3: Baseline parameters for case c). In particular, z < implies tat clean consumption costs more tan dirty consumption. Wen we tink of clean consumption we usually imagine someting tat is more expensive for individuals or a society in general. In fact, in many cases, environment-friendly products are costlier to produce. As an example, consider a municipality wic as to decide weter to design and construct a waste management program tat integrates a recycling process or not. But tis is not always te case. For instance, if we ave to decide ow to go to work, we ave to coose between tree different possibilities: walking, taking a public bus or driving a car. In tis case, a clean consumption is also te less expensive coice (i.e. walking). On te oter and, owever, dirty consumption generates pollution and as a consequence damages te environment; tis implies a series of requalification activities tat require efforts and resources. An interesting result to note is tat, in tis case, we can ave a rising pollution even if consumers prefer clean to dirty consumption. Te fact tat consumers gain more utility from clean consumption is not sufficient to guarantee a decreasing pollution over time. 4.2 Te time pat of pollution P wen ασ z < βθ Now we consider te case in wic ασ z. Equation (27) as two parts: te first part tends to zero as t increases, wile te second is a negative exponential function: tus, in tis case, pollution as a negative slope and tends to zero in te long-run, becoming negative at some point (see figure 4). Since in tis case ασ z < βθ, eiter consumers prefer clean to dirty consumption (i.e. σ < θ ) or clean consumption abates more tan dirty consumption pollutes (α < β) or cost of dirty < βθ 11

14 Figure 4: Case 2 - ασ z < βθ P 0 K 0 α β σ θ γ ρ A δ z Table 4: Baseline parameters wen ασ z < βθ. consumption is greater tan tat of clean consumption (i.e. z > ) or a mix of tese tree options apply. Tus, altoug we will not get into details since te same considerations given in te previous paragrap apply in tis case, it is important to remark tat te evolution of pollution over time is te result of te interaction of tree different parameters. All tese tree parameters are a consequence of consumption differentiation: consumption differentiation affects consumers preferences because consumers gain different utility from clean and dirty consumption; product differentiation also affects te pollution stock because clean consumption abates pollution wile dirty consumption increases pollution wit an intensity given by te two parameters α and β; tis latter aspect is measured troug te parameters α and β: α measure te marginal damage of dirty consumption and β measure te social marginal benefit of abatement activity of clean consumption. Finally, consumption differentiation also affects te accumulation of capital K because clean and dirty consumption ave different costs; we can suppose tat z < because clean consumption requires more effort and more resources to be performed. However, due to te environmental damage caused by dirty consumption, one can suppose tat z > because te cost of environmental restore and requalification activities can be very ig. 4.3 Te non-existence of te EKC Results of te dynamic model do not indicate te existence of te EKC. Tis can be sowed if we use equation (27) and derive an analytical expression for te Pollution Income Relationsip (PIR). In particular, substituing equation (21) into (27) and remembering tat Y = AK, we can derive te following expression: P (Y ) = [ ( ασ P 0 I z βθ )] e γt + I 1 K 0 A ( ασ z βθ ) Y (28) 12

15 were I = K 0 ρ (σ+θ)(a δ ρ+γ). Hence, since I, K 0 and A are positive parameters, te PIR is linear and its sign depends on te difference ( ασ z βθ ). Consequently, as income grows, pollution eiter increases or deacreases depending on te specific values parameters (α and β, σ and θ, z and ) take. We ave already analyzed in detail te role and te meaning of tese parameters in te previous section. Te absence of te EKC as important implications for environmental policy. Results of our model sow tat it is possible to ave sustained growt and, at te same time, reduce te accumulation of pollution. However, to acieve tis goal, economic growt alone is not sufficient: attention sould be devoted to te pollution/abatement intensity of dirty/clean consumption, to te costs for te economy of producing te types of consumption and te environmental awareness (measured by te elasticities of substitution between te two consumption types). It is wort noting tat tese tree variables are deeply related to te traditional arguments often cited to explain te EKC. Substitution of clean consumption wit dirty consumption measures te composition effect, te cange in te structure of te economy tat gradually increases activities (consumption in tis model) tat produce less pollution. Pollution/abatement intensity of dirty/clean consumption measures te tecnique effect: te dirty and obsolete tecnologies are replaced by upgraded new and cleaner tecnology, wic improves environmental quality. At te same time, since more resources are devoted to te development of cleaner tecnologies, te economy can afford te cost of a clean consumption. Wat s relevant in te results of tis model, is tat economic growt per se does not produce tese effects. Hence, tere is no inverted U-saped relationsip between economic growt and environmental degradation. It is obvious tat an increasing demand for a better environment induces structural canges in te economy tat tend to reduce environmental degradation: on one and, increased environmental awareness and greener consumer demand contribute to sift production and tecnologies toward more environmental-friendly activities; on te oter and, tey can induce te implementation of enanced environmental policies by te government (suc as stricter ecological regulations, better enforcement of existing policies and increased environmental expenditure). However, te linkage from income growt to alleviation of environmental deterioration is not automatic. 5 Environmental awareness, costs and pollution-abatement intensities Wat does it appen to pollution wen ασ βθ z and are not fixed but vary between zero and one? Te answer to tis question is illustrated in figure 5: it contains two level plots wit te areas between te levels filled in solid color, identifying te values of P. Figure 5a sows wat appens to P as ασ z increases, ceteris paribus; figure 5b sows wat appens to P as βθ increases, ceteris paribus. A key sowing ow te colors map to pollution values is sown to te rigt of te plot. Figure 5 sows tat te pollution pat depends on te interaction of all tese parameters. ασ βθ P 0 K 0 γ ρ A δ z Table 5: Baseline parameters for figure 5. 13

16 (a) (b) Figure 5: Pollution over time wit varying ασ z (a) and βθ (b) As mentioned before, σ and θ measure ow consumers utility cange wen dirty or clean consumption cange; tey gives a measure of consumers desire for a better environment, since if we care for te environment and we are aware of te damages a dirty consumption causes on te environment we sould gain more utility if a greater proportion of clean consumption is performed; increasing environmental awareness implies a θ greater tan σ; in oter words, a θ greater tan σ reflect te demand for a better environmental quality (i.e. environmental awareness); demand for a better environment induces canges in te distribution of consumption between dirty and clean goods in favor of te clean goods and tis tends to reduce environmental degradation. A very ig σ and a corresponding low θ mean tat people do not care for te environment and consume dirty polluting commodities. On te contrary, a low σ and a corresponding ig θ mean tat consumers care for te environment and prefer clean commodities. Environmental awareness tends to increase wit income: wen a country acieves a sufficiently ig standard of living, people attac increasing value to environmental amenities. After a particular level of income, te willingness to pay for a clean environment rises by a greater proportion tan income (Roca, 2003). Tis will be reflected troug defensive expenditures, donations to environmental organizations or coice of less environmentally damaging products. Tus, ric people value te clean environment and preserve it. Generally, it is recognized tat income elasticity of environmental quality demand and resource goods is in excess of unity, i.e., clean environment and preservation are luxury goods. Many EKC models ave empasized te role of income elasticity of environmental quality demand and tis elasticity is often invoked in te literature as te main reason to explain te reduction of emission level. An adequate explanation of observed EKC relationsips for some pollutants, are consistent wit te ig-income elasticity of environmental quality demand. Poor people ave little demand for environmental quality, owever, as a society becomes ricer, its members may intensify teir demands for a more ealty and cleaner environment. Te consumers wit iger incomes are not only willing to spend more for green products but also create pressure for environmental protection and regulations. In most cases were emissions ave declined wit rising income, te reductions ave been due to local and national institutional reforms, suc as environmental legislation and market-based incentives to reduce environmental degradation. Te demand for a better environment depends on several factors and not only on income: 14

17 market mecanisms (i.e. prices of te clean goods), education and information accessibility, regulation and oters beavior (friends, parents, partners, media). In te model developed in tis study, environmental awareness alone is not sufficient to guarantee a decreasing pollution pat. We must take into consideration also te costs for society and te pollution/abatement intensities of two types of consumption. Tus, we ave a counterintuitive result tat pollution increases even wen te proportion of clean consumers is relatively ig compared to te proportion of dirty consumers. Tis is very easy to see if we inspect equation (27), P (t) = [ ( ασ P 0 I z βθ )] ( ασ e γt + I z βθ ) e (A δ ρ)t ασ It is possible to ave a U-saped pollution pat (i.e. z ), even if σ < θ: tis appens wen te marginal damage of dirty consumption is ig (i.e. α > β) and te social cost of clean consumption is greater tan tat of dirty consumption (i.e. > z). 6 Conclusions Environmental pollution is generated eiter troug te production process or troug te consumption of goods and services. Tere is a need to concentrate on te impacts of consumption activities on environmental pollution rater tan tose of production activities since production is induced mainly by consumption and few studies ave examined tis so far. Tis paper investigated te relationsip between economic growt and pollution focusing on te impact of consumption beavior on te environment. Different assumptions on te way consumers value te environmental quality lead to very different results. Tis paper employed a simple AK endogenous growt model and analyzed te consequences in terms of economic growt and pollution of aving two types of consumption beavior: a clean one (pro environment) tat abates pollution and a dirty one tat increases pollution, were pollution does not enter directly te utility function. In fact, consumers do not always observe pollution per se but rater its impact on te environment; sometimes, even te effect of pollution on te environment is not observable immediately. Tis is true if we tink, for instance, to te depletion of te ozone layer; and it is also true if we tink about climate cange (wic is a long-term cange wose effects on te environment are, fortunately, not fully evident yet). Te results sowed tat tere is no environmental Kuznets curve relationsip between economic growt and pollution. Te pat of pollution over time crucially depends on te pollution intensity of dirty consumption and abatement intensity of te clean consumption, on te costs for te economy of producing te types of consumption and te environmental awareness (measured by te elasticities of substitution between te two consumption types). Regarding tis latter aspect, we ave found tat only under some specific conditions an increase in te proportion of clean consumption reduces pollution. Tis result requires te costs of producing environmental differentiation to be sufficiently low. However, depending on te values tat te relevant parameters (i.e. cost of product differentiation, pollution intensity of dirty consumption and efficacy of abatement activity of clean consumption) take, te level of polluting emissions can grow wit environmental awareness. > βθ 15

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