Environmental Engineering Reference
In-Depth Information
where:
E
5 environmental indicator;
y
5 per capita income;
P
5 population density;
g
5 economic growth rate;
p
5 policy variable;
b 5 parameter to be estimated;
t
5 time trend;
e 5 error term.
Empirical studies on economic growth and the environment
The shape of the relationship between economic growth and the environ-
ment centres around four main explanations. It does not, however, imply
that there is a causal relationship between economic growth and environ-
mental quality (Perrings and Ansuategi, 2000). The i rst explanation is the
sectoral composition of the economy. The theory is that as the economy
moves along the production structure from agriculture to industry, local
air and water quality is bound to deteriorate due to the nature of industri-
alization. Industry in the low-income countries is mainly based on highly
polluting industries, such as chemicals, textiles, food processing, and so
on. As income rises, the economy moves towards expanding the services
sector, and thereby, environmental quality improves (Grossman and
Krueger, 1991; Panayotou, 1993, 1997; De Bruyn, 1997).
The second explanation is the technology shifts that accompany eco-
nomic growth. The interpretation is that as the economy becomes richer,
companies tend to use cleaner technology, which, in turn, improves envi-
ronmental quality (Seldon and Song, 1995; De Bruyn, 1997; Andreoni and
Levinson, 1998).
The third explanation is the income elasticity of demand for envi-
ronmental quality. It is interpreted that, since environmental quality is
a luxury good, as per capita income rises, the demand or preferences
for environmental amenity increase, and therefore new institutions and
regulations are created to protect the environment. However, given the
nature of environmental quality being a non-marketable good, changes
in its demand can be captured indirectly through changes in technology,
consumption, policy and regulations as well as their direct impact on the
environment (Antle and Heidebrink, 1995; McConnell, 1997).
The fourth explanation is the environmental constraints or the carrying
capacity of the biosphere. It is argued that economic growth is constrained
by the carrying capacity of the environment. In other words, there is a
limit to pollution or depletion resulting from growth that can be absorbed
by the environment, beyond which economic growth will come to a halt,
especially if the ef ects of growth on the environment are irreversible. This,
