THE DEMOGRAPHIC TRANSITION AND THE ECOLOGICAL TRANSITION: ENRICHING THE ENVIRONMENTAL KUZNETS CURVE HYPOTHESIS

Marzio Galeotti (Universit à di Milano, IEFE -Bocconi )

Alessandro Lanza (Eni Corporate University S.p.A .)

Maria Carla Ludovica Piccoli (Enel S.p.A .) This paper is about:

(1) Environmental Quality/Degradation

(2) Income/Economic Growth

(3)

These are fundamental aspects of (SD)

In this presentation I will briefly talk about:

- (I) SD: alternative ways to represent the interrelations between (1)-(2)-(3)

- (II) Literature on (1)-(2)-(3) and empirical results

- (III) The two “Transitions” and this paper’s empirical results (I) Sustainable Development (SD) THE “CAPITAL” BASE OF SD

Sustainable Development

(TK/POP)/ T≥ 0

(+) (-) Km

Total Kh capital Technological Change assets TK Kn

Ks THE POVERTY/POPULATION/ENVIRONMENTAL DEGRADATION “TRAP”

Population increases

Poverty increases Environment worsens THE KAYA IDENTITY

GenerateGenerate incomeincome

HumanHuman Consuming beingsbeings Consuming energyenergy (Population)(Population) And

Pollution Energy Income Pollution = XX X Population Energy Income Population THE KAYA IDENTITY

Wide differences between advanced countries and developing countries : the CO 2 case (*)

CO CO 2 Energy Income GDP) 2 = x x Population Energy Income (GDP) Popolazione

World 4.28 = 2.41 x 0.20 x 9.29 OECD 10.97 = 2.37 x 0.17 x 27.31 Latin America 2.21 = 1.85 x 0.15 x 8.06 Asia 1,35 = 2.11 x 0.17 x 3.86 Africa 0.92 = 1.40 x 0.27 x 2.48 China 4.58 = 3.08 x 0.19 x 7.65

“The effect on global emissions of the decrease in global energy intensity ( -33%) during 1970 to 2004 has been smaller than the combined effect of global income growth (77 %) and global population growth (69%) with the result of increasing energy - related CO2 emissions ” (WGIII contribution to the IPCC AR4, 2007).

(*) Source: IEA 2009 Key World Energy Indicators – 2007 data WHY IS THIS HAPPENING? TWO STYLIZED VERSIONS

1. ConsumptionConsumption of of natural natural The cause of POPULATION resourcesresources pollution is population GROWTH WasteWaste discharge discharge growth

2. The cause of ECONOMIC Distorted lifestyles pollution is GROWTH Distorted lifestyles economic growth (II) Literature and Empirical Results 1. ENVIRONMENT AND POPULATION

• Highly debated, yet comparatively under-researched empirically

• Vast number of published articles on the link population - environmental changes appeared in the last few decades (Lutz, Prskawet, and Sanderson, 2002)

• Particularly lacking are systematic empirical studies examining comprehensively the population-environment relationship at the global level

Neo-Malthusians – Pessimists •Ever since Malthus, Ricardo and Mill, concern that rising population would deplete agricultural and other natural resources and significantly contribute to environmental degradation (Ehrlich, 1968; Meadows, Meadows, Zahn, and Milling, 1972). Neo- Malthusians like Ehrlich and Holdren (1971), Kahn, Brown, and Martel (1976) and Ehrlich and Ehrlich (1990) regarded population growth as a significant, if not the major, factor behind environmental degradation. 1. ENVIRONMENT AND POPULATION

Cornucopians – Optimists •Boserup (1965) and later Simon (1981, 1996) argued instead that a rising population needs not lead to more depletion as high population densities provide fertile ground for institutional and technological innovations to overcome any apparent resource constraint. •Commoner, Corr, Stamler (1971) maintained that environmental degradation is not largely due to population growth. •The so-called cornucopians regard human ingenuity as the ‘ultimate resource’. Since more people mean that problems are tackled by more brains, a larger population renders more likely the scientific, technological and institutional progress necessary to overcome any apparent environmental problem.

Although the issue can ultimately only be settled at the empirical level, the above contributions have been largely speculative. It was only in the mid-1990s that population was accounted for in the empirical work on the relationship between environmental quality/degradation and income. 2. ENVIRONMENT AND INCOME/ECONOMIC GROWTH

The relationship between environmental degradation and income/GDP has been traditionally investigated within the framework of the so-called Environmental Kuznets Curve (EKC) . The EKC is an empirical description of the relationship between measures of economic growth and environmental quality

After Simon Kuznets who in the 1940s = α +α +α 2 +α 3 y 0 1x 2 x 3 x empirically identified an inverted-U historic relationship between income distribution and income growth, dubbed “Kuznets Curve”

Main idea : starting from low (per capita) income levels, (per capita) emissions or concentrations of pollutant tend to increase but at a slower pace. After a certain level of income (which typically differs across pollutants) – the “turning point” - emissions or concentrations start to decline as income further increases. 2. ENVIRONMENTAL KUZNETS CURVE: A SHORT DETOUR

Two main explanations : • (1) Kuznets behavior is an income effect and results from the environment being a luxury good . Early in the economic development process of a country individuals are unwilling to trade consumption for investment in environmental protection: environmental quality declines as a result. Once individuals reach a given level of consumption (or income), they begin to demand increasing investments in an improved environment. • (2) EKC as an expression of “stages of economic growth ”. Countries make a transition from agriculture-based to industry and then post-industrial service-based systems. The transition from an agricultural to an industrial economy results in increasing environmental degradation as mass production and consumption grow. The transition from an industrial to a service- based economy is instead assumed to result in decreasing degradation due to the lower environmental impact of service industries.

• Powerful implication : Delinking or Decoupling – Growth is both cause and cure of environmental problem. Press on the growth pedal. 2. ENVIRONMENTAL KUZNETS CURVE: A SHORT DETOUR

• Underlying EKC there is a long-standing debate. In the early phases, about thirty years ago, the prevailing view was that economic growth was a threat to the environment. The world will not be able to sustain growth indefinitely without running into resource constraints or despoiling the environment beyond repair. No room for endless economic development, rather we should start thinking in terms of a zero-growth situation. This was primarily the view of a number of respected social and physical scientists belonging to the Club of Rome: (1972)

• At the opposite extreme position according to which the fastest road to environmental improvement is along the path of economic growth:

“The strong correlation between incomes and the extent to which environmental protection measures are adopted demonstrate that in the longer run the surest way to improve your environment is to become rich ” (Beckerman, 1992) 2. ENVIRONMENTAL KUZNETS CURVE: A SHORT DETOUR

• EKC summarizes the empirical relationship between environment and economic development • Admittedly relationship very complex, depending upon a host of different factors, including: size of the economy, sectoral structure (including the composition of energy demand), vintage of the technology, demand for environmental quality, level (and quality) of environmental protection expenditures. All these aspects are interrelated.

• Above considerations are the likely explanation of why this research field has been explored firstly on empirical grounds and only afterwards with the help of theoretical models.

• Theoretical contributions belong to four major categories: - Optimal growth models - e.g. Tahvonen and Kuuluvainen (1994), Selden and Song (1995), Stokey (1998) - Models of the environment as a factor of production - Lopez (1994), Chichilinsky (1994). - Endogenous growth models - Lighthard and van der Ploeg (1994), Bovenberg and Smulders (1995, 1996), Stokey (1998). - Other macroeconomic models , include overlapping generation models – e.g. John and Pecchenino (1994) , Jones and Manuelli (2000), and simple static models – e.g. Stokey (1998), Andreoni and Levinson (2001) 2. ENVIRONMENTAL KUZNETS CURVE: A SHORT DETOUR

• As noted by Shafik (1994), the above debate lacked empirical evidence to support one argument or the other, remaining on a purely theoretical basis for a long time. The main reason was the unavailability of environmental data for many years. However, it also reflected the difficulty of defining how to measure environmental quality. In the absence of a single criterion of environmental quality, several indicators of environmental degradation were used to measure the impact of economic growth on the environment. Obviously, the problem is that the use of various indicators implies the possibility of ambiguous answers of to the impact of growth on environment.

• In a spat of initial influential studies, twenty years later the beginning of the debate Grossman and Krueger (1991, 1995), Shafik and Bandyopadhyay (1992), Panayotou (1993, 1995), Shafik (1994), Selden and Song (1994) provided first empirical implementation of the idea. 2. ENVIRONMENTAL KUZNETS CURVE: A SHORT DETOUR

Lack of Lack of CO 2 SO 2 SPM NO X BO D/M SW Clean Water Urban Sanitation

Shafik and Bandyopadhyay (1992)

Panayotou (1993)

Grossman and Krueger (1993)

Shafik (1994)

Selden and Song (1994)

Grossman and Krueger (1995)

2. ENVIRONMENTAL KUZNETS CURVE: A SHORT DETOUR

CO 2 SO 2 SPM NO X BOD/M SW

Notes: Cole, Rayner, and

Bates (1997) CO = 2 SO = Sulphur dioxide 2 SPM = Suspended Particulate Schmalensee, M atter Stoker, NO = Nitrogen Oxides and Judson (1998) X BOD = Biochemical Oxygen

Demand

MSW = Municipal Solid Vincent (1997) * BOB

** M SW

n.a. = not available: the study did Carson, Jeon, and not cover this environmental McCubbin (1997) indicator

Bruyn, Bergh, and Turning Points: Opschoor (1998)

Islam, Vincent, and The fist two digits are to multiplied

by 1,000

($85) means that per capita GDP is Panayotou (1999) expressed in 1985 U.S. dollars

($85p) means that per capita GDP

is expressed in 1985 U.S. dollars on

a PPP basis Panayotou, Sachs, and Peterson (1999)

ENVIRONMENTAL DEGRADATION, INCOME, POPULATION: EMPIRICAL ASPECTS

Following Panayotou (2000) let:

(1)

• Pessimists/Neo-Malthusians view: population elasticity is at least one if not higher • Optimists/Cornucopians view: population elasticity is certainly below one, unlikely to be statistically different from zero and possibly even negative

• Empirical studies explicitly examining link population - pollution in a systematic quantitative manner are very few in number (Cramer, 1998, 2002; Cramer and Cheney, 2000; Dietz and Rosa, 1994, 1997; York, Rosa and Dietz, 2003; Shi, 2003; Cole and Neumayer, 2006).

Assume f to be linear homogenous in its arguments:

(2) DATA

• To best capture demographic movements necessary long time series.

• Data for emissions of carbon dioxide (million metric tons) are available from the Oak Ridge National Laboratory’s CDIAC from 1861 through 2006. These data are made available by ENERDATA together with GDP expressed in PPP 2000 millions USD and population in thousand people. Historical data on population and GDP were originally developed in three books by Maddison (1995, 2001, 2003). Historical data on carbon dioxide emissions are from Boden, Marland, and Andres (2009).

• Because of the length of the sample the number of countries considered has to be restricted to 17 OECD nations. These are: The country are: Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Sweden, Switzerland, UK.

• The examined variables are expressed in log form and estimation is performed for each country using ordinary least squares (OLS). A panel estimation with fixed country effects is also performed. ENVIRONMENTAL KUZNETS CURVE: EMPIRICAL RESULTS - QUADRATIC ENVIRONMENTAL KUZNETS CURVE: EMPIRICAL RESULTS - CUBIC ENVIRONMENTAL DEGRADATION, INCOME, POPULATION: EMPIRICAL ASPECTS

• This is the prototypical relationship at the basis of the “Environmental Kuznets Curve” hypothesis. According to it, GDP and population are the two forces that affect the level of pollution in the empirical reduced-form relationship describing the EKC

• However, population does not play an independent role relative to income ; EKC is invariably stated in per capita terms, to capture the idea that two countries with the same GDP but with different number of inhabitants will not in general produce the same amount of pollution

• Relative to (1), expression (2) contains a testable assumption, as it imposes linear homogeneity. One way to assess whether population plays a role in addition to income is to test for homogeneity of (1) by looking at the statistical significance of the population regressor in:

• (3) ENVIRONMENTAL KUZNETS CURVE: EMPIRICAL RESULTS – THE ROLE OF POPULATION - QUADRATIC ENVIRONMENTAL KUZNETS CURVE: EMPIRICAL RESULTS – THE ROLE OF POPULATION - CUBIC (III) The “Transitions ” and This Paper ’s Empirical Results THE ECOLOGICAL TRANSTION

Pollution per capita Incipient pollution

ENVIRONMENTAL KUZNETS CURVE Abatement (EKC)

GDP/POP

Pollution per capita Actual pollution

GDP/POP THE DEMOGRAPHIC TRANSTION

Population

Birth rate

DEMOGRAPHIC Death rate KUZNETS CURVE Percapita GDP (DKC) Phase I Phase II Phase III

Population Growth

Population Growth

Percapita GDP THE DEMOGRAPHIC TRANSTION

• Phase I : Life expectancy low and fluctuates widely as land, food and clean leads to famines and epidemics. Mortality fluctuates more than fertility. Population of pre-modern society rises ti the point where living standards are low enough to bring to equilibrium high birth and death rates

• Phase II : first, death rates drop quickly due to productivity growth (mainly agriculture) removing economy from brink of starvation and due to technical advances in public health and medical care. These reduce deaths but not directly alter reproductive behavior. Subsequently fertility declines faster than mortality, largely driven by soicio- economic factors as rising levels of education, real income and liìfe expectancy as well as higher female labor force participation rates.

• Phase III : stable population at high living standards DEMOGRAPHIC KUZNETS CURVE: EMPIRICAL RESULTS - QUADRATIC DEMOGRAPHIC KUZNETS CURVE: EMPIRICAL RESULTS - CUBIC THE TWO TRANSTIONS TOGETHER (BALDWIN, 1995)

1.6 billions Incipient pollution

1.2 Birth rate

Death rate

Abatement

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 GDP Pro-capite per gruppi di reddito (migliaia US$) Phase I Phase II Phase III Source: R. Baldwin (1995), “Does sustainability require growth?” SUMMARY OF THE TRANSTIONS AND POLICY IMPLICATIONS

More that 50% of population is currently in Phase II of the demographic transition (explosive phase) and in a phase of the environmental one in which percapita pollution is still low

Moving from Phase II to Phase III of the demographic transition will bring about a reduction of the increase in pollution caused by population and a strong environmental impact

Policy implications

 People produce pollution and severe poverty generates population at unsustainable rate  Sustainability necessitates per capita income growth, at least among the world’s poor

1992 Earth Summit, Rio de Janeiro - Declaration

Principle 8: “… States should reduce and eliminate unsustainable patterns of production and consumption and promote appropriate demographic policies ” THE TWO TRANSTIONS TOGETHER (BALDWIN, 1995)

• R. Baldwin (1995), “Does Sustainability Require Growth?”

• With the exception of Baldwin (1995) none of the studies mentioned so far has investigated the nexus pollution, environmental degradation, and income within the conceptual framework of the two transitions: the demographic and the ecological one.

• Theoretical papers:scant - endogenous growth model with pollution and abatement by Aznar-Marquez and Tamarit (2005) - overlapping generations model by Marsiglio (2010)

• Incorporate the Demographic Transition (DKC) into the Ecological Transition (EKC): get an “Enriched” Environmental Kuznets Curve to get: THE TWO TRANSTIONS TOGETHER (BALDWIN, 1995)

• whence:

• and: “ENRICHED” ENVIRONMENTAL KUZNETS CURVE: EMPIRICAL RESULTS “ENRICHED” ENVIRONMENTAL KUZNETS CURVE: EMPIRICAL RESULTS “ENRICHED” ENVIRONMENTAL KUZNETS CURVE: EMPIRICAL RESULTS CONCLUDING REMARKS

• Although the role of population is accounted for in empirical investigations of the EKC hypothesis, there is more to it

• Population does not merely play a normalizing role for the income level of a country. Rather, countries undergo over time a demographic transition as their economic development progresses, in a manner similar to the ecological transition described by the EKC.

• Although the discussion of the impact of population growth on the quality of the environment is not new, Richard Baldwin (1995)’s insight has been to bring together demographic and environmental transitions within the analysis of the nexus between environment – income - population. It has been on that basis that he could conclude that economic growth is necessary for sustainability, and that demographic policies such as birth control measures can help toward that end

• Baldwin’s policy implications have been based on very valuable speculative considerations. What in a sense was lacking was statistical support. This is what the present paper has purported to do. SUMMARY OF THE TRANSTIONS AND POLICY IMPLICATIONS

• We have provided an econometric analysis of Demographic and Ecological Transitions. Although they could be investigated separately, we have incorporated the insights from the former into the latter to obtain an “enriched” Environmental Kuznets Curve hypothesis.

• This specification interestingly shows that the rate of population growth enters as an extra term the standard EKC formulation.

• It remains, however, as a preliminary step to understand which and how important the interrelations between the two transitions are, the implications one has for the other, possibly adopting a regional perspective, typically between rich and poor countries.

• A second important aspect to recall is that inverted-U EKCs may not hold for all pollutants and that the evidence in this respect is mixed. This holds in principle also for the demographic transition.

• A third caveat refers to the fact the EKCs are in general effective ways to summarize ex-post correlations, but they cannot be used to draw policy implications such as, say, unconditional and accelerated economic growth. Analogous considerations could be made for unconditional population growth! • Galeotti, M., A.Lanza and M.C.L. Piccoli (2010),“The Demographic Transition and the Ecological Transition: Enriching the Environmental Kuznets Curve Hypothesis”, mimeo, January 2010 • Galeotti, M., A.Lanza and M.Manera (2009), “On the Robustness of Robustness Checks on the Environmental Kuznets Curve”, Environment and Resource Economics (2009) 42, 551-574 • Galeotti, M. (2007),“Economic Growth and the Quality of the Environment: Taking Stock”, Environment, Development and Sustainability, 9, 427-454 • Galeotti, M., A.Lanza, and F.Pauli (2006),“Reassessing the Environmental Kuznets Curve for CO2 Emissions: A Robustness Exercise”, Ecological Economics, 57, 152-163 • Galeotti, M. and A.Lanza (2005),“Desperately Seeking Environmental Kuznets”, Environmental Modelling and Software, 20, 1379-1388 • Galeotti, M. (2003),“Environment and Economic Growth: Is Technical Change the Key to Decoupling?”, Working Paper N. 90.2003 • Galeotti, M. and A.Lanza (1999),“Richer and Cleaner? A Study on Carbon Dioxide Emissions by Developing Countries”, Energy Policy, 27, 565-573