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  1. 1. DEVELOPMENT ECONOMICS: IMPACT OF GROWTH ON ENERGY REQUIREMENTS AND CARBON EMISSIONS Deepmala Pokhriyal ECO 1207 Gokhale Institute of Politics & Economics Abstract The main purpose of this project is to analyse the impact of per capita GDP on the consumption of energy by the countries. Hence, a cross-sectional study is undertaken for the year 2009. Apart from the energy consumption, carbon emission is also investigated with the changes in per capita GDP levels and an attempt is made to recognise the factors on which the causality exists. The question is important from the perspective of energy economics and development economics. Governments of a number of countries focus on this for the purpose of formulating policies and hence a number of researches have been done on this issue and various results have been found. The project is based upon simple econometric techniques and results are different in a way that in some cases relation might be strong, while in others it might be weak or rather opposite. Since the recent issues concern environmental protection and sustainable usage of energy, the project tries to evaluate to its best, the factors that could affect these variables apart from the income levels; and hence some control variables are also used in the model. We also try to prove the Kuznets curve for the world pollution and growth. 1
  2. 2. Introduction The energy demand and consumption is increasing day by day all over the world and so an overall increasing trend has been discovered. There are different forms of energy and it is basically divided into renewable and non-renewable sources. The division of energy has brought up the fact that the non-renewable energy sources like oil, fossil fuel and gas are being used at an increasing rate in spite of other renewable sources being available. According to the International Energy Agency (IEA), the average per capita energy consumption has increased by 10% from 1990 to 2008, while the population increased by 27%. Energy consumption is associated with economic activity since industrial sector, as well as other sectors, highly relies upon energy availability. Countries use different sources of energy; however oil turns out to be the largest source. The findings about the energy consumption can be summarised with the help of the figure below. The graph shows that overall consumption has increased across the years and it is the non-renewable sources whose share dominates. It clearly indicates that there is something which stands to be the reason behind such growth rates. Hence, in this project we try to assess the impact of rising per capita incomes and population on energy consumption and see whether there is any causation. Why do we do this? It has been pointed out to the fact there is a need to put check upon the usage of energy as the sources are limited and would exhaust eventually. The growing concern of environmentalists has led the countries to form certain bodies like IEA, Sustainable Energy Authority Ireland, etc. The governments have also tried to involve themselves by formulating certain standards for energy consumption such as “International Energy Consumption Code (IECC)” by the United States of America for implementing the designing and construction necessities for energy efficiency. It is often believed that the rapid growth in population in underdeveloped and developing countries is the cause for the surge in per capita energy consumption, though there is also a large body of researchers who believe that it is the rich and technically advanced countries which consume majority of energy in their attempt to support high grade infrastructure and capital. Thus additional to the evaluation of an aggregate impact of per capita income on 2
  3. 3. energy consumption, sectoral analysis is also done by dividing the countries into high income, middle income and low income countries and summarising the results by comparing the size of the coefficients and their significance. The second part of the project deals with the carbon emissions from the countries and tries to bring out the causality between per capita income and the emissions. Again, we use the same time period and set of countries with the similar approach of getting aggregate as well disaggregated income level differences effect upon emission. This subject is of importance due to the growing concern of environmentalists about the changing composition of Earth’s atmosphere and increased CO2 levels which lead to global warming and other negative impacts globally. The approval and adoption of Kyoto protocol which sets standards on the emission of greenhouse gases brings in the debate which says that highly advanced countries produce more greenhouse gases than less advanced countries, and so we try to analyse this through an econometric framework. We try to see that whether this relation is strong, weak or absent. Control variable like population level is also employed in the model for more efficient results. The inclusion of population helps us to realise and identify the intensity of the causes which are supposed to be behind the growing level of carbon emissions. Dividing the countries into different income groups is also beneficial as it shall help us to investigate the Environmental Kuznets’s Curve and bring in more detailed causation across all the countries of the world. The reason for an inverted U-shape curve is based upon the fact that emission levels are less in the initial stages of development; however it increases as development proceeds, but with more sophisticated ways of preventing pollution through technical advancements the levels finally decrease, hence giving an inverted U-shape. The first part of the project is mainly to assess the causation between per capita consumption of energy and per capita income (GDP). We expect a positive relation between the two, as according to the available literature and other studies, consumption of energy increases as the income increases. There could be reasons which attribute to this relation like: at the household level for instance, with the increased incomes and capacity to spend, more and more energy consuming devices are brought in use. We specify the model of our first part as: y = β1 + β2(GDP per Capita) + β3(population) + ei Here, y is energy per capita consumed (in million btu) and apart from per capita GDP, population is also used as variable for it also effects the demand for energy. The impact of population cannot be predicted before the analysis, because we use energy consumed in per capita terms, hence one intuition says that, as the population increases the total energy divided amongst all individuals should decline, however we can also say that as the population increases the total consumption of energy may increase more than the increase in population which then can have an overall positive effect on per capita energy consumed. The graph shown below shows the relationship between the growth of economy given by per capita incomes and energy use per capita. 3
  4. 4. A better representation of the relation is given by the log of per capita income and log of per capita energy use. We observe a very strong correlation between the two variables which means that as income grows, the use of energy also rises. Now dividing the countries into the three stages of development, namely developed(greater than $20000), developing(between $2000- $20000) and underdeveloped(less than $2000), we get a set of 32 developed countries, 33 underdeveloped countries and 67 developing countries from 132 countries. 4
  5. 5. The diagrams show the difference in consumption of energy for different levels of development. The countries at the highest and lowest level don’t change their energy needs much as the ones at the top already have reached the maximum energy requirements and the ones at the bottom use energy required for subsistence. For the developing countries, the energy levels are the highest as they struggle to reach the status of a developed nation. Relation between the level of pollution and Economic Growth Pollution is the introduction of contaminants into the natural environment that causes adverse change. Pollution can take the form of chemical substances or energy, such as noise, heat or light. Pollutants, the components of pollution, can be either foreign substances/energies or naturally occurring contaminants. The major forms of pollution are listed below along with the particular contaminant relevant to each of them: Air pollution: the release of chemicals and particulates into the atmosphere. Common gaseous pollutants include carbon monoxide, sulphur dioxide, chlorofluorocarbons (CFCs) and nitrogen oxides produced by industry and motor vehicles. Light pollution: includes light trespass, over-illumination and astronomical interference. 5
  6. 6. Littering: the criminal throwing of inappropriate man-made objects, unremoved, onto public and private properties. Noise pollution: which encompasses roadway noise, aircraft noise, industrial noise as well as high-intensity sonar. Soil contamination: occurs when chemicals are released by spill or underground leakage. Radioactive contamination, resulting from 20th century activities in atomic physics, such as nuclear power generation and nuclear weapons research, manufacture and deployment. Thermal pollution, is a temperature change in natural water bodies caused by human influence, such as use of water as coolant in a power plant. Visual pollution, which can refer to the presence of overhead power lines, motorway billboards, scarred landforms (as from strip mining), open storage of trash, municipal solid waste or space debris. Water pollution, by the discharge of wastewater from commercial and industrial waste (intentionally or through spills) into surface waters; discharges of untreated domestic sewage, and chemical contaminants, such as chlorine, from treated sewage; release of waste and contaminants into surface runoff flowing to surface waters (including urban runoff and agricultural runoff, which may contain chemical fertilizers and pesticides); waste disposal and leaching into groundwater; Eutrophication and littering. Here in this project, we shall only be dealing with CO2 emissions which a major part of the pollution emitted or discharged in the society. The main aim of this part of the project is to relate the level of pollution in economies to their level of growth. It has been empirically and theoretically proved that as the economy grows; it requires more energy to produce goods and services (what we proved in the first half of the project) and thus more emissions and wastes. It can be argued that the world has now been shifting to more conventional forms of energy; moving to renewable resources but the statistics show that only 3% of total world energy use is supplemented by such resources and the larger chunk is still managed by polluting non renewable sources of energy. We shall also try and see if the KUZNETS’ CURVE holds for the economy as a whole. The impact of reforms and environmental laws in regulating degradation will also be looked at and analysed. Thus, we will show how such laws affect pollution levels and also the growth of economy and do such laws in any way inhibit the economic growth. Pollution and Economic Growth (Kuznets’ Curve) The environmental Kuznets curve is a hypothesized relationship between various indicators of environmental degradation and income per capita. In the early stages of economic growth degradation and pollution increase, but beyond some level of income per capita (which will vary for different indicators) the trend reverses, so that at high-income levels economic growth leads to environmental improvement. This implies that the environmental impact indicator is an inverted U-shaped function of income per capita. Typically the logarithm of the indicator is modelled as a quadratic function of the logarithm of income. The EKC is named for Kuznets (1955) who hypothesized income inequality first rises and then falls as economic development proceeds. 6
  7. 7. Therefore, the equation for Kuznets Curve can be written as 𝒍𝒐𝒈 𝒑𝒐𝒍𝒍𝒖𝒕𝒊𝒐𝒏 = 𝜷𝟏 + 𝜷𝟐 𝒍𝒐𝒈 𝒈𝒅𝒑 + 𝒆 For the data for 187 countries for the years 1960- 2005, the following results were found: SUMMARY OUTPUT Regression Statistics Multiple R 0.784948 R Square 0.616143 Adjusted R Square 0.608146 Standard Error 0.252783 Observations 50 ANOVA df Regression Residual Total Intercept log gdp SS MS F Significance F 1 4.923204 4.923204 77.04643 1.51E-11 48 3.067161 0.063899 49 7.990364 Coefficients Standard Error t Stat P-value Lower 95% Upper 95%Lower 95.0% Upper 95.0% 1.422009 0.302447 4.701687 2.21E-05 0.8139 2.030119 0.8139 2.030119 0.340139 0.038751 8.77761 1.51E-11 0.262226 0.418053 0.262226 0.418053 The results showed that per unit change in per capita income leads to 0.340 change in pollution but since the data suggests only 61% of the changes in pollution can be explained by the changes in GDP per capita, the goodness of fit is less and thus the data cannot be widely used for analysis. The positive sign of GDP per capita shows that the level of pollution will rise with economic growth and the negative sign of the coefficient of GDP2 tells that the increase will be at a decreasing rate. Also plotting the same for the India and China gives us the following results: INDIA Regression Statistics Multiple R 0.931131 R Square 0.867005 Adjusted R Square 0.864234 Standard Error 0.137051 Observations 50 Coefficients Standard Error t Stat P-value Lower 95% Upper 95%Lower 95.0% Upper 95.0% Intercept -1.78473 0.142641 -12.5121 1.01E-16 -2.07153 -1.49793 -2.07153 -1.49793 log gdp 0.451514 0.025525 17.68939 1.15E-22 0.400193 0.502834 0.400193 0.502834 7
  8. 8. CHINA Regression Statistics Multiple R 0.969975 R Square 0.940851 Adjusted R Square 0.939619 Standard Error .32376 0 Observations 50 Intercept log gdp Coefficients Standard Error t Stat P-value Lower 95% Upper 95%Lower 95.0% Upper 95.0% -4.61335 0.24688 -18.6866 1.15E-23 -5.10974 -4.11697 -5.10974 -4.11697 1.167546 0.042254 27.6317 3.97E-31 1.082589 1.252503 1.082589 1.252503 The above data shows the impact of economic growth on the two of the world’s emerging economies. The data shows the difference between the development paths of the two countries. For India, the pollution increase by 0.45 for a unit increase in GDP per capita but for China, it is as high as 1.167 for each increase in GDP per capita. The significant difference between the two is basically due to the sectoral division of the economy; India’s economy has the highest composition of services and therefore lesser pollution than Chinese for they are more inclined towards manufacturing. Therefore we can also say that a sectoral difference in economies also adds differently to the levels of pollution. The Chinese economy is the second largest in the world after the USA which has been contributing the maximum to environment degradation. Even for USA, the effect of economic growth on pollution is 0.41064; the number looks quite small as compared to China or even India but it is a deception. The country over the time has contributed its bit and now has completed turned into a service economy but even today the pollution levels are high enough. Also US has been exporting its polluting industries to the developing world reducing the blame on it. Plotting the data for the 189 countries for the year 2009 on a graph shows the following: pollution vs log gdp per capita 50 45 40 35 30 25 20 15 10 5 0 -5 0 pollution vs log gdp per capita 50 100 150 200 8
  9. 9. We can see that the level of pollution is higher for the developing countries as compared to the developed world but there are some countries with higher levels of pollution and environment degradation. These single peaks at certain growth levels can be regarded as exceptions and a generalised idea can be concluded that as the economies grow, the level of pollution will decline or even can grow with it. As we know, as economic growth is experienced by countries across the globe, their consumption of energy for production rises and thus more and more pollution is emitted. But as their growth is constant and high enough, the country can take goals apart from growth and thus they concentrate on the degraded environment and laws for strict environment conservation are made and implemented. At such higher level of per capita incomes, a little growth can be compromised for better environment and future. Such a situation gives rise to an inverted U shape curve which is given by the Environment Kuznets Curve; a curve designed by Simon Kuznets. It lies in parallel to the Kuznets Inequality Curve given in 1955. The Environment Kuznets Curve (EKC) says that the pollution will first increase with the level of GDP per capita, reach maximum and then decrease at higher levels of income. The policy implications of this finding according to some are grow first and then clean up. Some have argued that economic growth is a panacea or “cure all” for environmental degradation, “in the end the best and probably the only-way to attain a decent level of environment quality.” Another writer claims that existing environmental regulations by reducing growth may actually be reducing environmental quality. The explanations for Environmental Kuznets Curve are given as follows: a. A natural progression of economic development from clean agrarian economies to polluting industries to clean service economies. b. Advanced economies exporting their pollution to less developed countries. c. The internalization of externalities requires relatively advanced institutions for collective decision-making. d. Another model is that below a threshold level of pollution only the dirtiest technology will be used. e. Environmental quality is a stock resource that degrades over time. f. Demand for environmental quality overtakes supply ultimately. 9
  10. 10. Therefore, we can see that there exists a stronger relationship between the reduction of pollution and stronger environment laws and this can very well explain the downward shift in the EKC. The graph below shows the trend for the world over the four decades for economic growth and level of pollution. As we can see, the world economy has been growing with time and newer innovations and technology in every field has also led to increase in pollution levels. But the increment in the level of pollution has seen a very different path. When the world was primitive, every year added a lot of pollution to the environment and thus the growth rate of pollution was very high but as the world was on the path of development, at various stages, the importance of the sustainable development was realised and thus the growth of pollution fell. Trends for the world economy Figure: The graph shows the different stages of growth of pollution where till 198o, the pollution increased at an increasing rate which was later smoothened by the strict policies like Stockholm Conference and Earth First for the world. The pollution again rose after 2003 for the decline the production and upcoming recession led to more use of resources and pollution. It has been quite constant over the time and again started rising after 2003. There is always a trade off for the countries to reduce the economic growth and pay attent ion to the problem of environment degradation and this sacrifice for one another leads to another important phenomenon which can be regarded as an extension of Kuznets Curve and is called the double hump model; in this model, after reducing their pollution to a certain extent, the countries again increase production and shift their polluting processes to other territories thereby increasing pollution again. This leads to an upward trend again for the pollution levels. Again the importance of environment leads to a decline in pollution level. The above graph has shown an upward trend, then a constant (non increasing) and then again an increasing trend in pollution over the years which is the double hump. The last stage of the relation cannot be seen in the figure above. 10
  11. 11. As it can be seen that the growth of pollution was indeed high at the earlier stages and as the world economy grows, the level of pollution falls with better laws. Around the 80’s, the growth of pollution fell and it increased after 2007. Seeing the history chart, it can be seen that the years around 1980 and 2007 had experienced great turmoil in the field of environment regulations and economic growth. growth of pollution 0.06 0.04 0.02 0 growth of pollution -0.02 -0.04 -0.06 Figure: The figure shows how the growth of pollution has been trending over the years. The 1980s obviously showed a negative growth of pollution which later took an upward turn during the 2000s Until the late 1960s, most international agreements aimed at protecting the environment served narrowly defined utilitarian purposes. Beginning with the 1972 Stockholm Declaration of the United Nations Conference on the Human Environment, however, international agreements came to reflect a desire to limit damages to the environment. These international agreements paralleled national legislation which increasingly sought to preserve the environment. International environmental law encompasses a diverse group of topics, Earth First is a radical environmental advocacy group that emerged in the south western United States in 1979. It was co-founded on April 4th, 1980 by Dave Foreman, Mike Roselle, Howie Wolke, and less directly, Bart Koehler and Ron Kezar. There are Earth First! groups in the United States, United Kingdom, Canada, Australia, Netherlands, Belgium, Philippines, Czech Republic, India, Mexico, France, Germany, New 11
  12. 12. Zealand, Poland, Nigeria, Slovakia, Ireland, Italy, and Spain. Many such initiatives were even taken in India where the EPA, 1986 was passed and thus the pollution was under control. Thus we can see that proper laws and regulations have led to better management of environment in the path of growth. Now we shall be looking at the relation between the environment regulations and level of pollution control. Impact of regulations on level of pollution The downward shift in the Kuznets curve is very well explained by the policies regarding environment and thus as the economy grows, governments try and focus on sustainability. This leads to the stricter rules but they can’t for always compromise on growth and after taking a lot of conservative measures for environment, they again go for economic growth leading to higher pollution levels again. We can in a sense say that the governments always go for a constant trade off between environment degradation and economic growth. The same conclusion can be seen from the real world data over time. 20 Trends for European economy over the years 18 16 14 12 10 pollution level 8 log gdp per capita 6 4 2 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 0 Figure: The pollution trend for Europe experienced a sharp structural break in around 1980s after the Stockholm Conference and other Acts in Europe to control over its increasing share in environment degradation. Also greater use of renewable resources reduced its pollution levels. The above figure shows the trend for pollution and per capita incomes for Europe over the years 1960-2009. The upward trend in pollution was interrupted and a downfall was seen in the years around 1980 due to the better and stricter environment laws and regulations. After the year 1980, the European countries have been trusting renewable sources of energy and utilising them to their potential. Renewable resources, which are eco friendly and emit least pollution, account for around 9% of their total energy consumption and it is among the highest for the world. The pollution has therefore been quite stable after the mid 80’s along with increased GDP growth. For the middle income countries, the level of pollution has been rising and shall continue to rise for a very long period now. The reason being the level of development for these 12
  13. 13. countries; the demonstration effect plays its role. The countries face competition from the already developed world and therefore have to make constant efforts for reaching their status. The second struggles for the living standards of the first world and in the process have to undergo huge production of goods and services and thereby increase the pollution levels. Also the developed countries have been shifting their production processes in the third world and developing countries to reduce their levels of emissions and portraying a better image in the world. They have been shifting to the services sector domestically. The newer international norms for environment fix quotas and limits pollution by countries. The developed countries trade these quotas of the developing world and hence increase overall pollution levels in the world. 14 Trends for the developing economies. 12 10 8 pollution 6 log gdp per capita 4 2 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 0 Figure: there has been a general trend for the developing countries for pollution which has been increasing over time with no changes or breaks in between. This is basically due to the Demonstration Effect in imitating the Developed world. The figure above shows the trend of the middle income countries for the level of pollution with increase in GDP per capita over time. The increasing trend in pollution with no breaks and downward slope in growth rate of pollution can be described by the constant struggle and competition with the developed world which leads to no sacrifice of economic growth. These countries might turn to better sustainable methods of development only after reaching a specific growth rate. Conclusion The project seemed to prove the already established relationship between income per capita and energy consumption. Also the effect of different incomes has different effects on the per energy consumption; the developed countries have high levels of energy consumption to sync with their standard of living but the growth of energy consumption remains constant because their energy levels have reached the maximum. But for the developing and third world countries, their growth of energy consumption has been tremendous but the level has been low because they are still struggling to reach a minimum standard of living. Also as the level of incomes rise, the level of energy consumption rises and so does their level of pollution. But the lower growth of energy 13
  14. 14. consumption does not mean lower levels of pollution for the developed world. These countries shift their pollution production process to the developing world increasing their pollution emissions. Therefore, we can never use the energy consumption by countries and their pollution levels as a proxy of each other. The pollution relation with GDP per capita can be best traced by the Kuznets Curve; upward sloping for the initial levels of development and then a download slope as the highest levels of growth when the countries can trade off a little growth for better future. The stricter environmental regulations have led to a control over the growing pollution levels and hence a better future for the citizens. So there has been a dilemma of whether the countries should follow the path of economic growth or the path of sustainable development with benefits accruing to the present as well as the future generations. References 1. World Bank data on GDP per capita incomes, pollution levels and energy consumption. 2. Statistics for Europe energy consumption and share of renewable resources. 3. Types of pollution and information about Earth First. 4. Details of Kuznets Curve and its Origin. 5. Empirical research on Kuznets Curve. 14