Resources, Environment, and Economic Development

Resources, Environment, and Economic Development FOCUS QUESTIONS • • • • What is the relationship between economic growth and the environment? What are recent economic and environmental trends? Will economic growth encounter ecological limits? How can economic development become environmentally sustainable? 2.1 OVERVIEW OF ECONOMIC GROWTH Prior to the Industrial Revolution in the eighteenth and nineteenth centuries, the human population grew slowly and material living standards changed little. While data are limited, historical records suggest that in the 2,000 years prior to the Industrial Revolution the world population grew slowly from about 200 million to 1 billion. Average incomes changed even less during this period, from the equivalent of about $500 per person annually to only about $700.1 In other words, economic growth was essentially non-existent prior to the Industrial Revolution. The advent of market economies and rapid technological progress, centered in Western Europe, altered this pattern dramatically. Population in Europe entered a period of rapid growth that led the British classical economist Thomas Malthus to theorize that population would outgrow food supplies, keeping the mass of people perpetually at a subsistence standard of living. Malthus’s Essay on the Principle of Population, as It Affects the Future Improvement of Society, published in 1798, initiated a long and continuing debate on the relationship between population growth, technology, and natural resources. History has proved the simple Malthusian hypothesis wrong: Although population in Western Europe more than doubled in the 100 years following the publication of Malthus’s Essay, economic output per person grew at an even greater rate. 2 And on a global scale, population growth up to the present has been accompanied by rising average living standards, despite significant inequality. But if we consider a more sophisticated argument—that a growing human population and economic system can eventually outrun their biophysical support systems — the debate turns out to have strong current relevance. Malthusian hypothesis the theory proposed by Thomas Malthus in 1798 that population would eventually outgrow available food supplies. The debate over population and economic growth is intimately intertwined with resource and environmental issues. In the twenty-first century it is unlikely that we will see major shortfalls in food supply on a global scale, although food crises resulting from rising prices have occurred, such as when average global food prices nearly doubled from 2007 to 2008.3 But it is very likely that the environmental stresses associated with population and economic growth, in particular the impacts of global climate change, will require major policy changes with substantial effects on economic production systems. Measuring Growth Rates In approaching complex issues of economic growth and the environment, we first need to define how economic growth has traditionally been measured by economists. Gross domestic product (GDP) is defined as the market value of final goods and services produced within a country’s borders over a specified time period, usually a year. A country’s GDP can grow over time due to changes in two factors: population and per-capita (or per-person) GDP. In other words, we can define the GDP of a country using the simple identity: GDP = (population) × (per capita GDP) We can then define this identity in terms of growth rates, to show the relationship among the GDP growth rate, the population growth rate, and the per capita GDP growth rate: 4 GDP growth rate = (population growth rate) + (per capita GDP growth rate) gross domestic product (GDP) the total market value of all final goods and services produced within a national border in a year. GDP growth rate the annual change in GDP, expressed as a percentage. We can use this equation to solve for one of these three variables when we know the other two. For example, suppose the population of a country increased by 10 percent during some time period, and that the country’s GDP grew by 14 percent during this same period. We can then conclude that GDP per capita grew by 4 percent. To correct for the effects of inflation, we should use real GDP rather than nominal GDP in this equation. Real per capita GDP will rise steadily provided that real GDP grows at a consistently higher rate than population. For this to occur, economic productivity must also rise steadily, based on technological improvements and capital investment. This increasing productivity is, of course, the key to escaping the Malthusian trap. real GDP gross domestic product corrected for inflation using a price index. nominal GDP gross domestic product measured using current dollars. One of the reasons the Malthusian hypothesis was refuted in the 19th century is that new technologies were developed that relied on energy from coal. Increased agricultural productivity allowed the portion of the population working in farming to decrease, freeing labor for industrial development. Increased industrial productivity led to higher living standards, measured in traditional economic terms as growth in real GDP per capita. Broadly speaking, technological improvements and increased fossil fuel energy use have led to steady global economic development, although this growth has been unevenly distributed across the world. Factors Essential to Economic Growth How is steady growth in productivity and GDP per capita possible? Standard economic theory identifies two sources of increased productivity. First is the accumulation of capital. Recall our discussion of the standard circular flow model from Chapter 1—capital is one of the three standard factors of production, along with labor and land. With investment the stock of capital can increase over time, which tends to increase the productivity of workers. Second, technological progress raises the productivity of capital, labor, and land. Standard economic growth models place no limits on this process. Provided that investment continues at adequate rates and technology keeps improving, productivity and GDP per capita can continue rising indefinitely. The ecological economics perspective focuses on three other factors as essential to economic growth. The first is energy supply. Europe’s economic growth in the eighteenth and nineteenth centuries depended heavily on coal as an energy source, and some writers at the time expressed concern that coal supplies might run out. In the twentieth century, oil displaced coal as the prime energy source for industry and transportation. Currently oil, natural gas, and coal (i.e., fossil fuels) provide about 80 percent of energy supplies for both developed and developing nations. 5 To a great extent, economic growth in both agriculture and industry has been a process of substituting fossil-fuel energy for human labor. This substitution has important resource and environmental implications, which in turn affect projections of future economic growth. natural capital the available endowment of land and resources, including air, water, soil, forests, fisheries, minerals, and ecological life-support systems. The second fundamental factor ecological economists emphasize is supplies of land and natural resources. As mentioned in Chapter 1, economists have traditionally referred to “land” to account for the productive resources of nature. Ecological economists prefer the term natural capital to refer more broadly to the natural endowment of land and resources, including air, water, soil, forests, minerals, and ecological life-support systems. All economic activities require some natural capital to provide raw materials, whether it is the wood to make furniture, the land to grow crops, or the fish to make a meal. When economic development is at a low level, natural capital may seem abundant. But as economic activities expand, natural capital may not be sufficient to meet all needs. This may lead to conflicts, such as when housing competes with farming for rural land, or when highways make land less suitable for residential or agricultural use. Eventually, degradation or depletion of natural capital could constrain future economic growth. Land, of course, is fixed in supply. Except in very limited areas, such as the diked areas of the Netherlands, human technology cannot create more land. Natural resources vary in abundance, and human ingenuity may discover new resources or new uses for existing resources, but both mineral resources and the regenerative capacity of forests and other living resources have physical limits. The third important factor emphasized by ecological economists is the absorptive capacity of the environment to assimilate wastes and pollution. This issue is not so critical when the scale of economic activity is small relative to the environment. But as national and global economic activity accelerates, the flow of waste products increases and may threaten to overwhelm environmental systems. Flows of solid wastes, sewage and liquid wastes, toxic and radioactive wastes, and atmospheric emissions all pose specific environmental problems that require local, regional, and global solutions. absorptive capacity of the environment the ability of the environment to absorb and render harmless waste products. 2.2 ECONOMIC GROWTH IN RECENT D ECADES We next consider the history of economic growth, and its relation to issues of natural resources and the environment. Figure 2.1 tracks the history of several key variables since the 1960s. All variables are indexed to 1961, meaning that the value of each variable is scaled to equal 1.0 in 1961, and then the value for future years is expressed relative to the 1961 value. For example, the world population was 3.1 billion in 1961 and had risen to 6.2 billion in 2001. So the indexed population value for 2001 is 2.0, meaning it is twice as large as the 1961 value. The trends in Figure 2.1 tell a clear story that significant economic progress has been made over the last 60 years. The growth rates for food production, economic production, and energy use have all been greater than the rate of population growth. Thus, relative to 1961 the average person has access to more food, more economic production, and more energy. Other measures of human well-being over this time period also indicate positive global trends. For example, life expectancy increased from 53 to 72 years over this period. Literacy rates have improved, and access to clean water and adequate sanitation facilities has expanded. Thus it seems that, at least so far, resource constraints have generally not been sufficient to hamper economic progress. Figure 2.1 suggests that, at least up to the present, the Malthusian hypothesis is not valid. Figure 2.1 presents average results for the entire world. But economic and social conditions can vary tremendously across countries. We don’t know from looking at Figure 2.1 if the overall picture of progress applies to both rich and poor countries. In Figure 2.2 we divide countries into three categories based on income levels—high, middle, and low.6 We see that average income levels in the high-income countries have increased (after an adjustment for inflation) from about $12,000 to $44,000 per capita over the last several decades. Income growth measured in percentage terms has been highest in the middle-income countries, mainly due to economic growth in China and India. Averaged over all middle-income countries, incomes grew from about $1,000 per person to more than $5,000. But economic progress in low-income countries has been negligible. Average incomes were only about $800 per person in 2019, essentially unchanged from the 1960s after adjusting for inflation. Figure 2.1 Growth in Population, Food Production, Economic Production, and Energy Use, 1961–2019 8 Index (1961=1) 7 6 5 4 3 2 1 Population Food Production Gross World Product 20 20 20 15 20 10 20 05 20 00 19 95 19 90 19 85 19 80 19 75 19 70 19 65 19 60 0 Energy Sources: Population, food production, and gross world product from the World Bank, World Development Indicators database; energy data from the U.S. Energy Information Administration, International Energy Statistics. Most recent food production data from FAO (FAOSTAT) and most recent energy data from BP (BP Statistical Review of World Energy). Figure 2.2 Economic Growth, 1961–2019, by Country Income Category Source: World Bank, World Development Indicators database. The data in Figure 2.2 demonstrate the extent of global economic inequality. But the results also suggest that we may need to consider the relationship between economic development and the environment differently in developed versus developing countries. Economic growth has been substantial in high- and middle-income countries; can such growth continue without depleting important categories of natural capital or over-loading the absorptive capacity of the environment? For low-income countries, is there a relationship between their very low average growth rates and the environment? resource curse hypothesis the theory that countries or regions with abundant natural resources actually grow more slowly than those where natural resources are scarcer. Until recently, an abundance of natural resources was generally considered to be a key ingredient in successful economic development. But in the last few decades economists have explored the “resource curse” hypothesis—that countries or regions with abundant natural resources actually grow more slowly than those where natural resources are scarcer. Numerous explanations have been proposed for this effect, including the high volatility of natural resource prices, the possibility for corruption, and violence from competition for access to resources. The resource curse hypothesis was first comprehensively tested in a 1995 paper which concluded that: [based on analysis of 97 countries] economies with a high ratio of natural resource exports to GDP [initially] . . . tended to have low growth rates during the subsequent period. This negative relationship holds true even after controlling for variables found to be important for economic growth, such as initial per capita income, trade policy, government efficiency, investment rates, and other variables.7 But the resource curse hypothesis is not universally accepted, as subsequent analyses both supported and refuted the hypothesis. 8 A 2016 meta-analysis reviewed 43 studies that tested the resource curve hypothesis and determined that 40% of studies found a negative relationship between economic growth and natural resource abundance, 40% found no significant relationship, and 20% found a positive relationship.9 Thus the authors concluded that “overall support for the resource curse hypothesis is weak” and that other factors such as a nation’s institutions and investment levels may be more important for explaining differences in economic growth. We will explore the relationship between economic development and the environment further toward the end of the book. meta-analysis an analysis method based on a quantitative review of numerous existing research studies to identify the factors that produce differences in results across studies. 2.3 ENVIRONMENTAL TRENDS IN RECENT DECADES As mentioned in Chapter 1, every few years UNEP publishes Global Environmental Outlook (GEO) reports that assess global environmental conditions and document trends. The most recent report when this book was written, GEO-6, published in 2019, finds that: … the overall condition of the global environment has continued to deteriorate since the first edition of GEO [in 1997], despite environmental policy efforts across all countries and regions. … Urgent action at an unprecedented scale is necessary to arrest and reverse this situation, thereby protecting human and environmental health and maintaining the current and future integrity of global ecosystems. 10 In this section we draw upon the GEO reports and other sources to present an overview of environmental trends. As with our overview of economic trends, we will take a global perspective toward environmental trends, but also consider how these trends vary between high- and low-income countries. The GEO-6 report includes separate chapters on five main categories of environmental impacts:11 1. 2. 3. 4. 5. Air Biodiversity Oceans and Coasts Land and Soil Freshwater The previous GEO report, GEO-5 published in 2012, also included a chapter specifically on chemicals and wastes. As this issue remains highly important, we include it below as a sixth category in assessing environmental trends. While we present data below on each of these six issues separately, the GEO reports emphasize that the earth is a complex system with interacting components. Further, the underlying drivers of diverse environmental impacts are related. At a simplified level, nearly all of the great acceleration of human impacts can be linked to expansion of both the human population and economic activity. Therefore, a piecemeal approach to solving separate environmental problems is generally not effective. The good news is that well-designed economic policies can address multiple environmental issues. For example, efforts to reduce fossil fuel dependence lower carbon emissions, but also reduce water pollution and habitat degradation from mining. The less-encouraging news is that such comprehensive policies tend to be more difficult to enact from a political perspective than targeted policies. We will spend considerable time throughout this text discussing policy options, including both market-based policies and other alternatives. Air Trends in emissions into the atmosphere can be broadly classified into two categories: those related to greenhouse gases (i.e., those that contribute to climate change) and those related to other air pollutants. GEO-6 concludes that: Historical and ongoing greenhouse gas emissions have committed the world to an extended period of climate change … Time is running out to prevent irreversible and dangerous impacts of climate change. Unless greenhouse gas emissions are radically reduced, the world is on course to exceed the temperature threshold set out in the Paris Agreement …12 The primary greenhouse gas is carbon dioxide (CO2). Figure 2.3 shows the global emissions of CO2 since the 1960s, with emissions steadily rising through 2018.13 But looking at the data in Figure 2.3 by income group tells a more informative story. First, we can see that the carbon emissions of the world’s poorest countries are negligible. Second, until recently the majority of global emissions were attributed to the high-income countries. Prior to 2000 more than half of global emissions were from high-income countries. Since then, emissions from high-income countries have actually decreased, by over 5%. Third, we see the rapid increase in emissions from middle-income countries, particularly upper middle-income countries. Emissions in the upper middle-income countries, primarily China, more than doubled between 2000 and 2018. As a result of these trends, CO2 emissions from high-income countries now comprise only about one-third of the global total. Further, most of the projected future growth in emissions will occur in the developing world. Clearly, as we’ll discuss in more detail in Chapters 12 and 13, an effective response to climate change will require a coordinated international response. The trends for other air pollutants offer a mix of policy successes and ongoing challenges. Data on major outdoor air pollutants, including sulfur dioxide (SO2), nitrogen oxides (NOx), and volatile organic compounds (VOC), find that global emissions increased significantly from 1940 to 1980. But from 1980 to 2010 emissions of SO2 declined by about 20 percent, and the growth in NOx and VOC emissions slowed.14 Once again, the trends differ in developing and developed countries. In North America and Europe, outdoor air quality has improved over the last few decades, with further improvements projected for the future. But in both East Asia (which includes China) and South Asia (which includes India) air quality has deteriorated, especially in metropolitan areas. We see the differences in air quality between developed and developing countries illustrated in Figure 2.4. The World Health Organization (WHO) recommends that annual average exposure to particulate matter (PM) should be less than 10 µg/m 3 (micrograms per cubic meter of air). Particulate matter is small particles suspended in the air, such as soot, dust, and smoke, that cause negative health impacts. Figure 2.4 shows that PM concentrations meet the WHO recommendation in countries such as Australia, Sweden, and the United States. But in developing countries PM concentrations are many times higher than the WHO guideline. The WHO estimates that more than 4 million people die prematurely each year due to outdoor air pollution, with 91% of these deaths in low- and middle-income countries.15 Figure 2.3 Global Carbon Dioxide Emissions, 1960–2018, by Country Income Category 40 Million Tons of Carbon Dioxide 35 30 25 20 15 10 5 0 1960 1970 Low 1980 Lower Middle 1990 Upper Middle 2000 High 2010 2020 World Sources: World Bank, World Development Indicators database (for data up to 2016); global and national data for 2017 and 2018 from the International Energy Agency, with author’s estimated allocations into country income groups. Figure 2.4 Average Exposure to Particulate Matter Air Pollution, Selected Countries, 2017 100 Average Annual Exposure (µg/m3) 90 80 70 60 50 40 30 20 10 rm an y Au Un stra li a ite d St at es Sw ed en il Ge Br az Ru ss ia d M ex ico an a ail Th Ch in er ia ia Ni g Ar ab Sa u di In d ia 0 Source: World Bank, World Development Indicators database. Indoor air pollution causes about as many deaths globally as outdoor air pollution. According to the World Health Organization nearly 4 million people per year die from indoor air pollution, with mortality rates the highest in Africa and Southeast Asia.16 The GEO-6 report notes that women and children have higher exposure to indoor air pollutants, which are commonly emitted when biomass sources such as wood and dung are used for cooking and heating without adequate ventilation. Two success stories stand out in reviewing the trends on air pollution. First, lead pollution has been dramatically reduced in developed nations. Lead inhalation can impede the neurological development of children and cause cardiovascular impacts, such as high blood pressure and heart disease, in adults. Mainly as a result of banning lead in gasoline, lead pollution in the United States declined by 98 percent from 1980 to 2019.17 For another major atmospheric success story, reduction of ozone-depleting emissions, see Box 2.1 and Figure 2.5. Box 2.1 Healing the Ozone Layer The earth’s ozone layer, located in the stratosphere about 20 to 30 kilometers above the earth, provides protection from most of the sun’s ultraviolet (UV) radiation. By blocking 97– 99 percent of incoming UV radiation, the ozone layer effectively reduces the damaging effects of UV rays, such as immune system suppression and skin cancer. Starting in the 1970s, scientists began to assert that the emissions of various chemicals into the atmosphere could deplete the ozone layer, mainly chlorofluorocarbons (CFCs) which were used as refrigerants, in aerosol sprays, and as cleaning agents. Initially, the chemical companies producing CFCs refuted the scientific claims, arguing that their chemicals were safe. But in the mid-1980s scientists discovered an “ozone hole” over Antarctica, where concentrations of ozone had fallen far more than anticipated. This helped galvanize the call for regulation of CFCs and other ozone-depleting substances (ODSs). In 1987 the Montreal Protocol treaty was drafted to schedule an international phase-out of CFCs and other ODSs. The Protocol eventually became the first United Nations treaty to be ratified by all member nations. Subsequent revisions to the Protocol actually increased the pace of the phase-out, particularly in developed nations. Often working in cooperation with environmental groups such as Greenpeace, chemical companies have developed alternatives to CFCs that are not harmful to the ozone layer. As shown in Figure 2.5, global production of CFCs declined dramatically after ratification of the Montreal Protocol. By 2005, production of new CFCs had virtually ceased. Since ODSs are long-lived in the atmosphere, with some persisting for 100 years or more, the ozone layer initially continued to deteriorate despite the Montreal Protocol. A 2014 assessment by the World Meteorological Organization and the United Nations concluded that the ozone layer was relatively stable since about 2000. The study estimated that the ozone layer should fully recover before 2050 in most parts of the world, and then somewhat later for the Antarctic ozone hole.18 Based on these results, former Secretary-General of the United Nations Kofi Annan called the Montreal Protocol “perhaps the single most successful international agreement to date.”19 Recent progress has been partially set back, according to a 2018 study in the journal Nature that reported an unexpected increase in global emissions of CFC-11 since 2013.20 A 2019 paper traced the primary source of the increased emissions to eastern China. 21 The United Nations is working to address the emissions, noting that “any illegal consumption and production of CFC-11 demands decisive action.”22 Figure 2.5 Global Production of Chlorofluorocarbons, 1980–2018 1,200 Thousand Tons 1,000 800 600 400 200 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 Sources: Alternative Fluorocarbons Environmental Acceptability Study, www.afeas.org/index.html; Domonoske, 2018. Biodiversity Biodiversity refers to the variety of different species in an ecological community. While some species naturally go extinct over time as ecosystems change, ecologists estimate that the current global extinction rate is 1,000 higher than the natural background rate, and comparable with previous mass extinctions, such as the one that killed off the dinosaurs 65 million years ago. 23 GEO-5 noted that: The state of global biodiversity is continuing to decline, with substantial and ongoing losses of populations, species and habitats. For instance, vertebrate populations have declined on average by 30 per cent since 1970, and up to two-thirds of species in some taxa are now threatened with extinction. Declines are most rapid in the tropics, in freshwater habitats and for marine species utilized by humans.24 biodiversity the variety of different species in an ecological community. The declining overall state of global biodiversity is shown in Figure 2.6, which presents the Living Planet Index, an aggregate indicator produced by the environmental organization World Wildlife Fund (WWF), from 1970 to 2016. The Living Planet Index is based on the populations of over 4,000 vertebrate species, including mammals, birds, reptiles, and fish. The data indicate that the planet’s biodiversity has declined by 68% since 1970, with the largest losses in South America and Africa. Figure 2.6 Living Planet Index, 1970-2016 Living Planet Index (1970=1) 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1970 1980 1990 2000 2010 2020 Source: Zoological Society of London and WWF GEO-6 reported progress in reducing biodiversity losses in some areas, but also that human pressure on ecosystems continues to increase. The most significant threats to biodiversity include agriculture/aquaculture, logging, and urban development. In the future these threats are likely to be overtaken by the impacts of climate change. According to one analysis in the prestigious scientific journal Nature, under a mid-range climate scenario 15–37 percent of species would be “committed to extinction” by 2050. 25 A 2015 paper finds that the percentage of species that will become extinct due to climate change would be 5 percent if average temperature increase is no more than 2°C,, but 16 percent under a business-as-usual scenario.26 GEO-6 calls for increased investment in global conservation efforts. The report finds that an adequate global response to biodiversity loss must also include reducing extreme poverty, gender inequality, and corruption. Oceans and Coasts Oceans cover over 70% of the earth’s surface, and about two billion people live in coastal areas. GEO-6 reports that human pressure on ocean health continues to increase as the population increases and people exploit more ocean resources. The GEO-6 chapter on oceans focuses on three major issues: 1. tropical coral reefs 2. ocean fishing 3. marine debris. Coral reefs are diverse ecosystems, containing about 30% of all marine biodiversity. The relationship between climate change and the health of tropical coral reefs is well documented. Coral reefs are adversely affected by both warmer water temperatures and the acidity that results from an increased concentration of carbon in the oceans. Scientists estimate that at least 70% of the world’s coral reefs have already been impacted by climate change, with impacts accelerating since 2015 when record ocean warm was recorded. There is a time lag of about 30 years between the time carbon emissions occur and the resulting impacts on coral reefs. Thus the negative impacts that we’re currently observing are linked to carbon emissions from the 1990s. Of course, global carbon emissions have increased since then, meaning that significant future negative impacts on coral reefs are largely unavoidable. Many reefs are unlikely to survive the 21st century. A 2012 analysis found that preserving more than 10 percent of the world’s coral reefs would require limiting global warming to no more than 1.5°C above pre-industrial levels.27 But as we’ll discuss in Chapter 13, current commitments by nations to address climate change suggest an eventual warming of nearly double this amount.28 Fish products are an important source of protein and other nutrients for about half of the world’s population. The health of most of the world’s fisheries is declining. As we’ll see in Chapter 18, an increasing share of the world’s fisheries are being over-harvested. Chapter 4 will introduce the economic theory of common property resources, which helps us understand why fisheries are commonly over-exploited. But we will also review the economic policies that can be used to promote more sustainable fishery management. GEO-6 reports that many countries have instituted successful fishery policies, noting that in countries “where capacity and political will exist to assess stock status and fishing mortality, and implement monitoring, control and surveillance measures, trends from 1990 to the present indicate that overfishing is usually avoided.”29 Finally, the build-up of marine litter is an area of increasing concern. About threequarters of marine litter is plastics, often less than 5 mm in size, which can cause negative health effects when ingested by marine species. Many plastics also release toxic chemicals as they break-down over time. As a result of ocean currents, plastic litter concentrates in several ocean regions. Perhaps the most well-known example of this is the Great Pacific Garbage Patch, an area three times the size of France located between California and Hawaii. According to a 2018 article, this area contains about 2 trillion pieces of plastic, with the amount increasing at exponential rates.30 While recycling can reduce the amount of plastic waste entering the world’s oceans, the longevity of plastic litter suggests that reducing the production of plastic is more important. This can be done by shifting to sustainable materials and simply using less material in production processes and packaging.