Dynamics of the Environmental Kuznets Curve

Just finished writing a survey of the environmental Kuznets curve (EKC) for the Oxford Research Encyclopedia of Environmental Economics. Though I updated all sections, of course, there is quite a bit of overlap with my previous reviews. But there is a mostly new review of empirical evidence reviewing the literature and presenting original graphs in the spirit of IPCC reports :) I came up with this new graph of the EKC for sulfur emissions:

The graph plots the growth rate from 1971 to 2005 of per capita sulfur emissions in the sample used in the Anjum et al. (2014) paper against GDP per capita in 1971. There is a correlation of -0.32 between the growth rates and initial log GDP per capita. This shows that emissions did tend to decline or grow more slowly in richer countries but the relationship is very weak -  only 10% of the variation in growth rates is explained by initial GDP per capita. Emissions grew in many wealthier countries and fell in many poorer ones, though GDP per capita also fell in a few of the poorest of those. So, this does not provide strong support for the EKC being the best or only explanation of either the distribution of emissions across countries or the evolution of emissions within countries over time. On the other hand, we shouldn't be restricted to a single explanation of the data and the EKC can be treated as one possible explanation as in Anjum et al. (2014). In that paper, we find that when we consider other explanations such as convergence the EKC effect is statistically significant but the turning point is out of sample - growth has less effect on emissions in richer countries but it still has a positive effect.

The graph below compares the growth rates of sulfur emissions with the initial level of emissions intensity. The negative correlation is much stronger here: -0.67 for the log of emissions intensity. This relationship is one of the key motivations for pursuing a convergence approach to modelling emissions. Note that the tight cluster of mostly European countries that cut emissions the most appears to have had both high income and high emissions intensity at the beginning of the period.

Seminar at University of Kassel

I promised more details on my seminar at University of Kassel: here they are. I will present our paper on modeling the emissions income relationship using long-run growth rates. My presentation will be at 2pm on 18 November in Sitzungsraum K33/FB07. If you need more details about location, ask Stephan Bruns who is organizing the "Empirical Workshop on Energy, Environment, and Climate Change" of which this talk is part. The workshop starts at 10 am and there will also be presentations by Heike Wetzel, Andreas Ziegler, Astrid Dannenberg, and Stephan.

A Toxa Meeting Website

The website with links to recordings of all the presentations at the 6th Atlantic Workshop in A Toxa is now up. I presented our paper on modelling the emissions-income relationship using long-run growth rates. There are also a few pictures. I'm somewhere in the back row in this one:

Modeling the Emissions-Income Relationship Using Long-Run Growth Rates

We have a working paper out on a new way of modelling the relationship between emissions and GDP per capita, a literature that has been dominated for more than two decades by the environmental Kuznets curve (EKC) approach. I presented an early version of this paper at the AARES conference at Port Macquarie in February. I will also be presenting it at the 6th Atlantic Workshop in A Toxa, Spain in late June and then at the World Congress of Environmental and Resource Economics in Istanbul a few days later.

The paper emerged from our work on Chapter 5 of the recently released Working Group III volume of the IPCC 5th Assessment Report. Reyer Gerlagh, who was one of the coordinating lead authors on my chapter drew up a version of the following graph and asked me if it would be suitable for the section I was writing on economic growth and emissions:

 

I liked this graph so much that I said we should write a paper about it, which we have now completed. Rather than compare the levels of emissions and GDP per capita as is usually done in the EKC literature, the graph compares the average growth rates of these two variables over a 40 year period (1971-2010). We can see that faster economic growth is associated with faster carbon emissions growth but that there is also a lot of variation around this main trend in the data. The further "southeast" a bubble is, the faster emissions per dollar of GDP (emissions intensity) declined in that country. As you can see China (the big red circle) and the US the big blue circle both had rapid declines in emissions intensity. But emissions intensity also rose in many countries and it is not immediately obvious how it relates to development status.*

One of the nice things about using growth rates rather than levels of variables is that it avoids several econometric problems that have plagued this literature. First and foremost is the issue of unit roots and non-linear functions of unit roots raised by Martin Wagner. Differencing the variables removes that issue, but using long-run growth rates focuses attention on long-run behavior, whereas using first differences would focus on the short-run. Then there is the issue of time effects raised by Vollebergh et al. We think our approach does a good job there too. The constant in a regression of emissions growth rates on income growth rates represents the rate of emissions growth if there were no economic growth. We think this is a good definition of a time effect. The paper discusses further econometric issues.

The other nice thing about using growth rates is that we can test the three main leading approaches to modelling the emissions-income relationship in a single framework:

In this equation all variables are in logs and "hats" (or more elegantly circumflex accents) indicate growth rates. On the lefthand side is the emissions per capita growth rate. As mentioned above the constant, alpha, represents the time effect. G-hat is the growth rate of GDP capita. The estimate of beta(1), therefore, tests the IPAT theory that growth causes increases in impacts. The term beta(2)*G(i) tests the EKC theory. This is because if beta(2) is negative then beyond a certain income level (the "turning point") more growth reduces emissions rather than increases emissions. The other main approach to modelling emissions growth has been the convergence approach, including the Green Solow Model of Brock and Taylor. We test this with the fourth term in the regression, which is the level of emissions intensity in the first year of the sample. If delta is negative, then countries with high initial emissions intensities saw more rapid decline in emissions. We also test for any effect of the level of GDP (gamma*G(i)) and for various other exogenous variables including fossil fuel endowments, legal origin, and climate.

It turns out that for both carbon and sulfur dioxide the effect of growth is very significant and close to a one to one effect. For sulfur there is a significant time effect - emissions fell by about 1.2% a year for a typical country when there was no economic growth. The convergence effect is also highly significant and probably explains a lot of the reduction in emissions intensity in both China and the US. But there is no environmental Kuznets curve effect in the full sample estimates.** While there is a marginally significant coefficient for one dataset, all the turning points are far out of sample and insignificant.

The environmental Kuznets curve has become so iconic that it often appears in introductory environmental economics textbooks. It probably is valid as a stylized fact for urban air pollution concentrations but it's not a good model of emissions of either carbon dioxide or sulfur emissions. We're hoping that the figure of the growth effect above and this one of emissions convergence:

might replace it.

* The blue circles are the developed countries that were members of the OECD in 1990. Orange is "economies in transition"  - Eastern Europe and the former Soviet Union. The other colors are the developing regions in Asia, Latin America, and the Middle East and North Africa.

** When we split the sample into two periods we find a very significant coefficient for sulfur in the second period, but the turning point is at $38k and is not statistically significant.

Port Macquarie Conference Paper Now on the Web

Our paper from the Port Macquarie AARES Conference is now on the web. We plan to have an updated and extended version of the paper on the web as a formal working paper in the next week or so. I'll write up a discussion about the paper then.

Carbon Co-benefits of Tighter SO2 and NOx Regulations in China

An in press paper by Nam et al. in Global Environmental Change uses a CGE model to estimate the co-benefits in terms of reduced CO2 emissions from the tougher new policies on SO2 and NOx emissions in the current Chinese 5 year plan. They find very large co-benefits with a reduction in CO2 emissions of 1.4 billion tonnes by 2015 alone. In later (post-plan) years these come to a large extent from switching to non-fossil energy. But in the short-run a large part of the reductions come from reducing energy use very significantly as shown in this figure from the paper:

The figure shows the reduction in energy use relative to business as usual in exajoules under an SO2 and NOx policy alone with no climate policy. For context, current Chinese energy use is in the rough ballpark of 100 exajoules a year. So the figure shows that by 2020 the reduction in energy use due to the policy relative to BAU is around this current level of Chinese energy use. This is simply huge. The policy also induces a complete shift away from using coal to generate electricity after 2040. The reason that the RHS figure above shows reduced coal use flattening out after 2035, is because China would already be using hardly any coal under this scenario.

Looking at historical analogs, when the US introduced tightened caps on SO2 emissions in the early 1990s there was some fuel switching in the long run to natural gas and other electric generation sources, but the main choice that electricity generators made was to switch to lower sulfur coal, to install scrubbers, and to use coal washing etc. I have less detailed knowledge of the reaction in Europe to similar policies but it involved these things in different proportions (more scrubbers and natural gas from what I understand). Presumably electricity use did fall a bit due to higher costs but not on a huge scale.

This model does not seem to have a low sulfur coal option though it does have a scrubber style abatement technology. Switching to natural gas can save some energy as it is a more efficient fuel for electricity generation and switching to renewables can save a lot of energy depending on how renewables are accounted for. But these things mostly happen after 2020 in this paper. So most of the reduced emissions are from reducing energy use on a large scale. Nothing like this happened in the US or Europe (or elsewhere) in reaction to such policies.

My thinking is that the large energy use reductions relative to BAU must be due to high elasticities of substitution between energy and other inputs (the model uses nested CES functions) or other model features that are not immediately apparent to me. The costs of the policy seem to be quite small in the first ten years, so the reduced energy use does not have a big economic impact in the short-run.

Global Anthropogenic Sulfur Emissions Updated to 2011

A new article by Zbigniew Klimont, Steven Smith, and Janusz Cofala updates Smith et al.'s estimates of global sulfur emissions to 2011. The global downward trend that started around 1990 or earlier * continues. The small increase in the early part of the last decade was just a blip:

This chart also shows some previous estimates. In general the trend has been revised down over time. The trend in China is also now heading down:

Another paper by Smith and Bond declares "the end of the age of aerosols". Well not quite yet. We'll have to wait till 2100 for that :)

The downside for me of this new data is that I will now have to redo all the econometrics in a paper I have in preparation (with Robert Kaufmann) that was almost ready for submission :(


* As shown in my 2006 paper, studies prior to Smith et al. 2001 showed emissions continuing to grow strongly through 1990. Smith et al. (2001) showed a flattening of the trend in the 1980s. My paper showed a plateau from the mid-1970s to 1990 and Smith et al. (2011) showed a slow downward trend from 1973 to 1990 and then a steeper decline.

Other Emissions of Greenhouse Gases and Aerosols

I only cover three other types of emissions besides energy related CO2. I thought of including black carbon but in the end decided to skip it as I already have too many papers. I resisted the temptation to try to include two of my papers in the collection, though I ended up discussing my paper more below :) I also include a graphic that will not be appearing in our book. It is from Smith et al. (2011) and compares the various estimates of sulfur emissions.

Deforestation and land-use change is an important source of emissions of CO2. Levels of emissions are much lower than from energy related sources, more stable over time, but also very uncertain. Houghton (2003) presents estimates of CO2 emissions from land-use change from 1850 to 2000, globally and by region. In general the tend rises from 1 to 2 Gt C over the 150 years with an acceleration in the trend around 1950 in common with emissions from energy related sources. Therefore, there is a clear link with economic growth. Tropical deforestation, particularly in Asia and Latin America dominates. In recent decades there is net reforestation in developed countries. Unusually, the data are increasingly uncertain in recent decades with estimates from different researchers varying substantially (Houghton, 2010).

The third most important greenhouse gas in the atmosphere and the second most important anthropogenic source is methane. Relatively little work has been done on CH4 in comparison to CO2. Stern and Kaufmann (1996) used available data to reconstruct the first time series of historic emissions from 1860-1993. They found that anthropogenic emissions had increased from 80 million tonnes of carbon in 1860 to 380 million in 1990. The relative importance of the various emissions sources changed over time though rice farming and livestock husbandry remained the two most important sources.

Offsetting the radiative forcing due to greenhouse gases is a significant negative forcing due to aerosols derived from sulphur oxide (primarily dioxide) emissions. These aerosols do not persist in the atmosphere for usually more than a few days and so the source of emissions is important and effects are localized though they spread far beyond the sources to affect neighbouring countries. The main sources of anthropogenic sulphur emissions are the combustion of coal and metal smelting. Stern (2006) showed that that after increasing fairly steadily from 1850 to the early 1990s global emissions began to trend downwards. Emissions in Western Europe and North America as well as Japan had already been trending down since 1970 primarily due to policies to reduce acid rain (Stern, 2005). But this decline was offset by growth in other regions. Following 1990, there was a dramatic reduction in emissions from Eastern Europe and the former Soviet Union. The likelihood that emissions will continue to decline in the future will contribute to future warming. Whereas Stern (2006) uses a combination of previously published data and model estimates, Smith et al. (2011) provide an inventory of sulphur emissions from 1850 to 2005 using a uniform methodology. The results largely confirm Stern’s (2006) findings though the levels are generally lower by a few percent.

References

Houghton, R. A. (2003) Revised estimates of the annual net flux of carbon to the atmosphere from changes in land use and land management 1850-2000, Tellus 55B: 378-390.

Houghton, R. A. (2010) How well do we know the flux of CO2 from land use change? Tellus 62B: 337-351.

Smith, S. J., J. van Ardenne, Z. Klimont, R. J. Andres, A. Volke, S. D. Arias (2011) Anthropogenic sulfur dioxide emissions: 1850-2005, Atmospheric Chemistry and Physics 11: 1101-1116.

Stern D. I. (2005) Beyond the environmental Kuznets curve: Diffusion of sulfur-emissions-abating technology, Journal of Environment and Development 14(1), 101-124.

Stern D. I. (2006) Reversal in the trend of global anthropogenic sulfur emissions, Global Environmental Change 16(2), 207-220.

Stern D. I. and R. K. Kaufmann (1996) Estimates of global anthropogenic methane emissions 1860-1993, Chemosphere 33, 159-176.

What Happened to the US Sulfur Emissions Market?

An interesting paper from Schmalensee and Stavins on the market for sulfur emissions in the US. This market is often cited as an example of the success of environmental economics and specifically cap and trade and I have used it as that in my teaching in the past. But what has happened more recently? The authors describe it as "ironic". After a period of relative stability often cited as a great success, the price of permits first sky-rocketed and then collapsed:



Essentially, the George W. Bush administration tried to tighten the cap on emissions significantly pushing the price up. In reaction EPA said they'd reconsider starting the collapse in price and then the courts overturned the new regulations. Then a couple of years ago the Obama administration then proposed state based emissions caps and limited interstate trading couple of years ago the market stopped trading entirely.

Schmalensee and Stavins still think that the program was a success if "ironic". I think this shows just how volatile emissions trading programs are and the likelihood of changes being made in response to price spikes that threaten or destroy the program. I think that the volatility of the European Union carbon trading market tells a similar story and increasingly shows that carbon taxes are the way to go. I used to be in favor of emissions trading due to the supposed certainty it would give on emissions reductions but real world experience shows that this could be a case of the perfect being the enemy of the possible.

EPA Modifies the US Sulfur Trading Program

From Richard Woodward posting on ResEcon:

"Some of you may have noticed in the news today mention of new regulations by the USEPA on SO2 and NOx emissions. The title of the articles could have been, "The SO2 trading program is dead. Long live the SO2 trading programs!"

Since many of us use the SO2 program as the epitome of what a trading program should look like and teach about it in our classes, I thought you might be interested in a quick overview of what led up to yesterday´s announcement and what it means for trading in the future. I am not an expert in this area, but have been watching these developments for some time.

Quick background:

2004. EPA determines that 28 states and DC contributed significantly to non-attainment in downwind states. This violates the Clean Air Act.

2005. EPA issues the Clean Air Interstate Rule (CAIR) with regional caps and a reduced aggregate cap. Trading continued under these rules.

2008. CAIR was challenged on a number of grounds (North Carolina v. EPA). Judge rules it does not comply with the Clean Air Act, which "requires states to limit emissions from sources that "contribute significantly" to non-attainment ... in downwind states."

July 2010. EPA issues the Transport Rule, a temporary fix to the problem. Trading of SO2 allowances appears to have stopped in May 2010.

July 7, 2011. EPA announces the final Cross-State Air Pollution Rule (CSAPR). From what I've read, CSAPR might be challenged, further delaying implementation of future trading. But if it goes ahead as planned, here's what we'll see.

CSAPR sets up four trading programs in place of the national SO2 trading program and the regional NOx programs. There are limits on the trading so that aggregate emissions from each state are capped, but I'm not entirely sure how this is ensured within the trading system.

Needless to say, there are a wide range of economic issues that deserve further analysis; I'm sure that the program will yield plenty of papers and dissertations. One aspect that I find interesting is that there is no phase in to this regulation -- SO2 allowances held by firms are retired without compensation.

You can access the complete document at EPA's web site."

Global Trends in Carbon and Sulfur Emissions

I'm preparing a lecture on environmental economics for both my course "Economic Way of Thinking 1" at the Crawford School and as a guest lecture in an introductory economics course at the Treasury. I'm planning to open the lecture by presenting some global and regional trends, focusing on carbon and sulfur emissions. First the global trends using data from CDIAC and Steven Smith:





and then data by country:





Really the global trends for sulfur and carbon are not that dissimilar. Carbon just trends much more strongly than sulfur so that there is slower growth in carbon in the 1980s and 1990s but a decline in sulfur emissions in that period. On the other hand, I don't think that the reversal in the trend of sulfur emissions that I wrote about a few years ago is yet being fundamentally reversed given recent progress in China, though I could be wrong.

The regional CO2 chart shows the UK with flat and declining CO2 emissions as being the outlier. This pattern is typical of several western European countries. The time path of sulfur emissions is much more similar for the UK and US. Reductions in emissions in Europe have been bigger than in North America. Australia is an outlier among developed countries in seeing rising emissions in recent decades.

New Sulfur Dioxide Dataset

Steve Smith of the Pacific Northwest National Laboratory and his team have completed work on their dataset of sulfur emissions from 1850 to 2005 by country and year. The paper is available for discussion on Atmospheric Chemistry and Physics' website.

I've known for a while that this dataset was under development, which is the main reason why I haven't updated my own estimates of global sulfur emissions available from my website. This new dataset provides the same format of annual data for each country. But the data is updated by five years and is also broken down into different sources of emissions. Estimation uses bottom up methods constrained by official observations where those are available.

My key finding was that a historic reversal in the trend of global sulfur emissions occurred in the 1980s and 1990s with the steep upward trend being replaced by a flattening out in the 1980s and a substantial decline in emissions in the 1990s. The new dataset shows the beginning of a possible renewed increase in emissions though it's still a relatively small fluctuation:



This largely appears to be driven by increasing emissions in East Asia:



and to a lesser extent in other developing regions. The paper does, however, note that there is a lot of uncertainty associated with East Asian and, in particular, Chinese emissions. The data shows a similar pattern to my estimates:



The main difference is that emissions in the plateau of the 1970s and 1980s are estimated to be lower than in most previous studies largely because of lower estimates for the former Soviet Union and China in those years.

Beyond the environmental Kuznets curve: Diffusion of sulfur-emissions-abating technology

A group of students in Sweden sent me some questions about my paper:

Stern D. I. (2005) Beyond the environmental Kuznets curve: Diffusion of sulfur-emissions-abating technology, Journal of Environment and Development 14(1), 101-124.

The paper is fairly technical and so I thought it might be useful to post my responses here.

What would you say is the main question in the framework of dematerialization in your paper?

The focus of my paper is on the reduction in sulfur emissions. I don't think the paper is mainly about dematerialization as I understand it, in particular. Within my focus on sulfur emissions I am mainly interested in changes in sulfur emissions when we hold many other things that are going on constant - what economists like to call "ceteris paribus". Now those things I am holding constant are the shift of the economy from manufacturing to services or from agriculture to industry etc. and also the shift in the mix of fuels say from coal to natural gas or from oil to electricity. Those changes will affect sulfur emissions. All of these moves may involve "dematerialization". The effects of these variables are displayed in Table 2 "Frontier parameter estimates".

What is left after controlling for those factors are the trends in Figure 2 "Emissions technology trends". Over time there has been a reduction in sulfur emissions holding all the table 2 factors constant in most countries. This results in less sulfur being emitted into the environment as sulfur dioxide but doesn't probably result in dematerialization.

What is your reasoning on how to realize this dematerialization of sulphur emissions?


One of the leading methods of sulfur abatement is flue gas desulfurization (see picture above) which reacts the gas with limestone to form calcium sulfate. This requires mining limestone, building the machinery that removes the pollutant and then disposing of the waste. And desulfurization consumes energy. In some cases the waste has been used in the building industry and so there hasn't been a big increase in material and energy used. Other approaches are using low sulfur coal and "washing coal" to remove sulfur prior to burning.


What are your personal opinions on the outcome of the paper?

The most interesting result for me was how the countries ended up grouping into two groups by 2000 - a low pollution group of Germanic/Scandinavian countries and Japan and a high pollution group of Mediterranean and Anglo Saxon countries. I didn't really expect to find that quite so clearly. Recently I realised that this seems to be related to the idea of "legal origin". French and English legal origin countries have higher pollution, ceteris paribus, and German and Scandinavian legal origin countries lower pollution. Japan's legal system is based on the German system. I also found that countries with higher per capita income, higher population density, and higher potential pollution if nothing was done about it had lower pollution ceteris paribus.

Legal Origin Strikes Again

van Ewijk and van Leuvensteijn have an article in VoxEU arguing for the EU to reduce taxes on residential mobility. What struck me was this chart:



The highest transactions costs are in French legal origin countries, moderate costs are seen in German and Scandinavian legal origin countries and the UK has the lowest costs. Ireland is stuck in the middle of the German group but the trend is still clear. This ordering is similar to the ordering of stringency of product and labor market regulation.

My research on sulfur emissions and now on energy efficiency has found that legal origin seems to make a difference in environmental policy. German and Scandinavian legal origin countries have the strictest environmental policies and English legal origin countries the weakest. French legal origin countries occupy an intermediate position.

Gapminder

Gapminder have produced one of those cool animated bubble graphs from my sulfur data, you can play with it here. They also have an interactive stack chart. Here is the founder of Gapminder, Hans Rosling in action at TED.

World Values Map

I was visiting the World Values Survey website in the process of collecting more data for my EERH project.Thought I'd post this fascinating "map" from their homepage:



Not surprisingly, the English speaking countries (sorry Quebecois) are found grouped together. I found this was also the case for levels of sulfur abatement technology. Similarly the Germanic or Protestant countries occupy a common zone and Japan isn't far removed, ditto. Mediterranean Europe is also tightly grouped (with the exception of Portugal), ditto.

Israel isn't that different to Italy or Greece. That makes a lot of sense to me.

Between Estimates of the Environmental Kuznets Curve

I submitted this paper to JEEM today. It follows up on a paper published earlier this year in the journal by Vollebergh et al. They argued that existing estimates of the environmental Kuznets curve are contingent on the treatment of the "time effects". Traditional panel data regression estimators assume that there is a different intercept for each country and often that there is a intercept for each time period which is common to all countries. Instead, one could assume that there is a different linear time trend in each country. Neither assumption though is likely to be true. In general the state of technology will be a different "stochastic trend" in each country.

Vollebergh et al. address this problem by assuming that the time effects (and the function of income) are the same in each most similar pair of countries in the OECD. For example, Belgium and the Netherlands. This allows a lot of heterogeneity across countries. But it isn't entirely unconstrained.

My approach is to use the "between estimator". First we find the mean of each variable over time in each country and then we carry out the regression on the means. The time effects are thus converted to constants (and any serial correlation in the residuals is also wiped out). We can, therefore, estimate the long-run coefficients of the model while making no assumptions about the nature of the time effects or the residuals.

This chart shows the time effects estimated using the between estimator for sulfur emissions in the OECD (I only show twelve of the trends to keep things simple):



(the y-axis is measured in natural logarithms). The lower the trend is the cleaner the country is on an income-adjusted basis. The results are pretty similar to those in my 2005 paper where I used a much more complicated structural time series model of a production frontier to estimate the trends.

Applied econometricians have largely shunned between estimates because either they think that they throw away a lot of information (I used to be in this camp) or they are worried about a potential correlation between the residuals and the regressors due to omitted variables. However, econometric research, discussed in the paper, shows that the traditional fixed effects estimator is just as likely to suffer from this problem and that the between estimator performs very well in realistic Monte Carlo simulations.

I'm planning to use this estimator for my ongoing Environmental Economics Research Hub project.