Economic Development and Environmental Protection

There is a long-standing debate on the relationship between economic development and environmental quality. From a sustainable development viewpoint there has been a growing concern that the economic expansion of the world economy will cause irreparable damage to our planet. In the last few years several studies have appeared dealing with the relationship between the scale of economic activity and the level of pollution. In particular, if we concentrate on local pollutants several empirical studies have identified a bell shaped curve linking pollution to per capita GDP (in the case of global pollutants like CO2 the evidence is less clear-cut). This behaviour implies that, starting from low per capita income levels, per capita emissions or concentrations tend to increase but at a slower pace. After a certain level of income (which typically differs across pollutants) – the “turning point” – pollution starts to decline as income further increases. In analogy with the historic relationship between income distribution and income growth, the inverted-U relationship between per capita income and pollution has been termed “Environmental Kuznets Curve”. The purpose of this chapter is not to provide an overview the literature: there are several survey papers around doing precisely that. We instead reconsider the explanations that have been put forth for its inverted-U pattern. We look at the literature from this perspective. In addition, without resorting to any econometric estimation, we consider whether simple data analysis can help to shed some light on the motives that can rationalize the Environmental Kuznets Curve.Climate Policy, Environmental Modeling, Integrated Assessment, Technical Change

Environment and Economic Growth: Is Technical Change the Key to Decoupling?

The relationship between economic growth and pollution is very complex, depending upon a host of different factors. Thus the study of this phenomenon represents a challenging endeavor. While most economics papers begin with theory and support that theory with econometric evidence, the literature on Environmental Kuznets Curves has proceeded in the opposite direction: first developing an empirical observation about the world, and then attempting to supply appropriate theories. A number of papers have aimed at providing the theoretical underpinnings to the Environmental Kuznets Curve. Prominent here is the class of optimal growth models. These are usually studied from the point of view of the analytical conditions that must hold in order to obtain an inverted-U functional relationship between pollution and growth. These models are however seldom confronted with the data. In this paper we take one popular optimal growth model designed for climate change policy analysis and carry out a few simulation exercises with the purpose of characterizing the relationship between economic growth and emissions. In particular, we try to assess the relative contribution of the ingredients of the well-known decomposition of the environment-growth relationship put forth by Grossman (1995): according to it, the presumed inverted-U pattern results from the joint effect of scale, composition, and technology components. We do this focusing on the developed regions of the world and on a global pollutant, CO2 emissions.Climate Policy, Environmental Modeling, Integrated Assessment, Technical Change

Desperately Seeking (Environmental) Kuznets

The number of studies seeking to empirically characterize the reduced-form relationship between a country's economic growth and the quantity of various pollutants produced has recently increased significantly. In several cases researchers have found evidence in favor of an inverted-U "environmental Kuznets" curve. In the case of a major greenhouse gas, CO2, however, the evidence is at best mixed. This paper attempts to shed further light on this issue by using a newly developed data set covering over one hundred countries around the world for the last twenty five years and by considering alternative functional forms together with an effort to rigorously discriminate among competing alternatives.Environment, Growth, CO2 emissions, Panel data

Desperately Seeking Environmental Kuznets

The number of studies seeking to empirically characterize the reduced-form relationship between a country economic growth and the quantity of various pollutants produced has recently increased significantly. In several cases researchers have found evidence in favor of an inverted-U “environmental Kuznets” curve. In the case of a major greenhouse gas, CO2, however, the evidence is at best mixed. This paper attempts to shed further light on this issue by using a newly developed data set covering over one hundred countries around the world for the last twenty five years and by considering alternative functional forms together with an effort to rigorously discriminate among competing alternatives.Environment, Growth, CO2 Emissions, Panel Data

Climate Policy and Economic Growth in Developing Countries

Although developing countries face a drastic increase in their greenhouse gas emissions, mitigation actions against climate change do not rank high among their priorities. The obvious reason lies in the necessity for them to continue the development process, which is characterised by pressing needs other than emission control. For developing countries the real problem is thus not emissions but economic growth. Therefore the key question is whether or not the Kyoto Protocol provides an opportunity for growth and thus for their economic development. The only way to accelerate the participation of developing countries in climate agreements - and therefore to come closer to the goal of a global climate control - is to design strategies which enable their economic development. The dilemma of reducing emissions on a global scale while ensuring growth in the poorer regions can only be solved if there are possibilities embedded in the agreements which can contribute to the sustainable development of those regions. As a consequence, greater emphasis must be placed on the economic development dimension of the Kyoto Protocol as far as the impact on developing countries is concerned.Climate Policy, Environmental Modeling, Integrated Assessment, Technical Change

Does Endogenous Technical Change Make a Difference in Climate Policy Analysis? A Robustness Exercise with the FEEM-RICE Model

Technical change is generally considered the key to the solution of environmental problems, in particular global phenomena like climate change. Scientists differ in their views on the thaumaturgic virtues of technical change. There are those who are confident that pollution-free technologies will materialize at some time in the future and will prevent humans from suffering the catastrophic consequences of climate change. Others believe that there are inexpensive technologies already available and argue the case for no-regret adoption policies (e.g. subsidies). Others again believe that the process of technological change responds to economic stimuli. These economic incentives to technological innovation are provided not only by forces that are endogenous to the economic system, but also by suitably designed environmental and innovation policies. In this paper, we consider and translate into analytical counterparts these different views of technical change. We then study alternative formulations of technical change and, with the help of a computerized climate-economy model, carry out a number of optimization runs in order to assess what type of technical change plays a role (assuming it does) in the evaluation of the impact of climate change and of the policies designed to cope with it.Climate policy, Environmental modeling, Integrated assessment, Technical change

At Home and Abroad: An Empirical Analysis of Innovation and Diffusion in Energy-Efficient Technologies

This paper contributes to the induced innovation literature by extending the analysis of supply and demand determinants of innovation in energy-efficient technologies to account for international knowledge flows and spillovers. In the first part of the paper we select a sample of 38 innovating countries and we study how knowledge related to energy-efficient technologies flows across geographical and technological space. We demonstrate that higher geographical and technological distances are associated with a lower probability of knowledge flow. In the second part of the paper, we use our previous estimates to construct stocks of internal and external knowledge for a panel of 17 countries and present an econometric analysis of the supply and demand determinants of innovation accounting for international knowledge spillovers. Our results confirm the role of demand-pull effects, as proxied by energy prices, as well as that of technological opportunity, as proxied by the knowledge stocks. In particular, this paper provides evidence that spillovers between countries have a significant positive impact on further innovation in energy-efficient technologies.Innovation, Technology Diffusion, Knowledge Spillovers, Energy-Efficient Technologies

Statistical and Economic Evaluation of Time Series Models for Forecasting Arrivals at Call Centers

Call centers' managers are interested in obtaining accurate point and distributional forecasts of call arrivals in order to achieve an optimal balance between service quality and operating costs. We present a strategy for selecting forecast models of call arrivals which is based on three pillars: (i) flexibility of the loss function; (ii) statistical evaluation of forecast accuracy; (iii) economic evaluation of forecast performance using money metrics. We implement fourteen time series models and seven forecast combination schemes on three series of daily call arrivals. Although we focus mainly on point forecasts, we also analyze density forecast evaluation. We show that second moments modeling is important both for point and density forecasting and that the simple Seasonal Random Walk model is always outperformed by more general specifications. Our results suggest that call center managers should invest in the use of forecast models which describe both first and second moments of call arrivals

On the Robustness of Robustness Checks of the Environmental Kuznets Curve

Since its first inception in the debate on the relationship between environment and growth in 1992, the Environmental Kuznets Curve has been subject of continuous and intense scrutiny. The literature can be roughly divided in two historical phases. Initially, after the seminal contributions, additional work aimed to extend the investigation to new pollutants and to verify the existence of an inverted-U shape as well as assessing the value of the turning point. The following phase focused instead on the robustness of the empirical relationship, particularly with respect to the omission of relevant explanatory variables other than GDP, alternative datasets, functional forms, and grouping of the countries examined. The most recent line of investigation criticizes the Environmental Kuznets Curve on more fundamental grounds, in that it stresses the lack of sufficient statistical testing of the empirical relationship and questions the very existence of the notion of Environmental Kuznets Curve. Attention is in particular drawn on the stationarity properties of the series involved – per capita emissions or concentrations and per capita GDP – and, in case of presence of unit roots, on the cointegration property that must be present for the Environmental Kuznets Curve to be a well-defined concept. Only at that point can the researcher ask whether the long-run relationship exhibits an inverted-U pattern. On the basis of panel integration and cointegration tests for sulphur, Stern (2002, 2003) and Perman and Stern (1999, 2003) have presented evidence and forcefully stated that the Environmental Kuznets Curve does not exist. In this paper we ask whether similar strong conclusions can be arrived at when carrying out tests of fractional panel integration and cointegration. As an example we use the controversial case of carbon dioxide emissions. The results show that more EKCs come back into life relative to traditional integration/cointegration tests. However, we confirm that the EKC remains a fragile concept.Environment, Growth, CO2 Emissions, Panel Data, Fractional Integration, Panel Cointegration Tests

The Dynamics of Carbon and Energy Intensity in a Model of Endogenous Technical Change

In recent years, a large number of papers have explored different attempts to endogenise technical change in climate models. The obvious reason is that technical change is widely considered the main route to achieving a significant reduction in global GHG emissions. This recent literature has emphasized that four factors – two inputs and two outputs – should play a major role when modelling technical change in climate models. The two inputs are R&D investments and Learning by Doing, the two outputs are energy-saving and fuel switching. Indeed, R&D investments and Learning by Doing are the main drivers of a climate-friendly technical change that eventually affect both energy intensity and fuel-mix. In this paper, we present and discuss an extension of the FEEM-RICE model in which these four factors are explicitly accounted for. In our new specification of endogenous technical change, an index of technical progress depends on both Learning by Researching and Learning by Doing. This index enters the equations defining energy intensity (i.e. the amount of carbon energy required to produce one unit of output) and carbon intensity (i.e. the level of carbonization of primarily used fuels). This new specification is embodied in the RICE 99 integrated assessment climate model and then used to generate a business as usual scenario and to analyze the relationship between climate policy and technical change. Sensitivity analysis is performed on different key parameters of the energy module in order to obtain crucial insights into the relative importance of the main channels through which technological changes affects the impact of human activities on climate. In addition, the effectiveness of different possible ways of combining Learning by Researching and Learning by Doing is also investigated.Climate Policy, Environmental Modelling, Integrated Assessment, Technical Change