D.  Greening the Economy

• Is there a conflict between environmental protection and economic growth?

• Green economy - an economy that improves human well-being and social equity, while reducing environmental impacts (U.N.)

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1.  Relationship between the economy and the environment

a.  Impact of economic growth on the environment

• Environmental quality is a normal good - people want more as income increases

• Is it a luxury good? - spending increases disproportionately as income rises

• Environmental Kuznets Curve - environmental impacts increase in early stages of economic development but eventually decrease above some income level

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• Richer country uses more resources, demand more energy, and produce more waste and pollution

• Can also afford to invest in renewable energy, install state-of-the-art pollution control equipment, and implement environmental policies

• Applies to some environmental impacts but not all

Ex. - Municipal solid waste, sulfur dioxide, carbon monoxide

b.  Impact of environmental protection on the economy

• Traditional view - environmental regulation imposes additional costs to firms and reduces profits

• Porter hypothesis - environmental regulations motivate firms to identify cost-saving innovations that otherwise would not have been implemented

• Evidence is mixed, tends not to support the Porter hypothesis at the national level

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c.  Decoupling

• Separate increased economic activity and increases in environmental impacts (bads)

• Relative decoupling - growth rate of environmental bad is positive but less than the economic growth rate

• Absolute decoupling - environmental bad is either stable or decreasing as the economy is growing

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• Decoupling may be occurring in developed countries because of exported emissions - emissions that are emitted in other countries to produce goods that are exported

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2.  Evidence

a.  Is environmental protection too expensive?

• Spending on environmental protection is 2 - 3 percent of U.S. GDP

• Comparable to what European countries spend

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b.  Does environmental protection lead to job losses?

• Loss of some jobs, others created

• Gains and losses can cancel each other out or result in a net gain

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c.  Does environmental protection reduce economic growth?

• Studies show that GDP growth is reduced

• Doesn't look at the benefits of regulation

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d.  Does environmental protection harm international competitiveness?

• Some sectors negatively affected, others positively affected

• Regulations could lead to increased productivity

3.  Creating a green economy

a.  Impact vs. business as usual

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b.  Policies

(1)  Shift investments in infrastructure, research, and development

(2)  Use taxes and other market-based instruments to internalize negative externalities

(3)  Decrease government spending that depletes natural capital

(4)  Temporary support measures to ensure employment transition for affected workers

(5)  Strengthen international environmental governance

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