Is Richer Greener?

Jonathan's fine post reminds us that some of the gloom-and-doom predictions of people like Paul Ehrlich have proven false, and that it is just as easy to exaggerate the problem of environmental degradation as to neglect it. But in rereading Tierney's column and some of his other work, I realized that Tierney's reporting on the environmental Kuznet's curve repeatedly makes a serious error. I don't know whether Jonathan has made the same error or not—not explicitly if he did—but it is worth explaining.

As Tierney describes it, the EKC describes a recurrent—but not universal—pattern where increasing wealth in a country is not (as Ehrlich predicted) correlated with increasing environmental degradation; instead, the emission of at least some types of pollutants and activity that causes other forms of environmental degradation flatten out and decline as wealth increases. Tierney observes this pattern and leaps to the conclusion that we needn't worry too much about global warming and other pollution problems because eventually the flattening out will occur in these cases as well. (And, indeed, he cites empirical research that shows a long-term reduction in carbon per unit of energy.)

But as Jonathan's examples make clear, the reason for this pattern has nothing to do with the problem of pollution properly understood—as a problem of negative externality. Consider the example of the saw blades. A firm that owns a patch of timber rationally switches from thicker to thinner saw blades because thinner saw blades waste less wood. If demand remains constant, then the firm will destroy fewer trees than in the past. In this way, technological development reduces what Tierney calls "environmental impact."

But in this example, environmental impact is purely internalized. When a firm can produce output with a new technology that wastes fewer inputs, it will do so. Happily for the rest of us, the extra trees may absorb some greenhouse gases, but that was certainly not the goal of the firm. It just happens that in this particular setting a firm's profit-maximizing decision to switch to a new technology benefits other people.

But this example reflects contingency only. Why would a profit-maximizing firm care about benefiting the rest of us? Indeed, it will surely destroy more trees than is optimal from the social standpoint since it does not internalize the full social benefit. But Tierney is not comparing the current level of forestation with the optimal level; he is comparing it with a level that existed at an arbitrarily chosen earlier period. Suppose now that a still newer saw blade technology will be even more efficient for the firm, but the manufacturing process needed to produce it generates loads of greenhouse gases. The firm will switch to this technology even though the social costs may be greater than the social benefits (in the form of cheaper wood, more trees, etc.).

I can see only two possible explanations for the EKC. The first is the one I provided in my earlier post: that as people become wealthier, they become more willing to pay for regulation that reduces pollution. (Wealthier people may also be able to demand and secure better governmental institutions that will reliably translate their preferences into outcomes.) The second is that, given our system of incomplete property rights that fails to internalize all positive and negative externalities, it is not surprising that technological change sometimes has positive effects on the environment (a new technology exploits inputs more efficiently, benefiting both the user who needs to pay for fewer inputs and third parties who suffer from less pollution), and sometimes has negative effects on the environment (a new technology benefits a user because it results in more waste being externalized on other parties). Julian Simon won his famous bet with Paul Ehrlich because it turns out that technological development frequently does outpace demand for resources, but Simon never claimed that it follows that we shouldn't tax activities that cause pollution—because it doesn't!

It is certainly possible that the first theory applies to carbon use. Fuels that generate energy alone rather than energy plus a bundle of harmful pollutants will, all else equal, provide greater benefits to those who use them because they get more energy for the buck. The long-term trend toward greater energy efficiency thus can be attributed, in part or even in whole, to market incentives, which have caused energy users to switch from less efficient (expensive) to more efficient (cheaper) sources of energy. But because these energy users care about clean energy only to the extent that it reduces their own costs, and not to the extent that it reduces costs for third parties, this process has occurred too slowly, and so government intervention is warranted.

I fear that people like Tierney have fallen prey to the notorious selection effect. They are looking for examples where environmental degradation has receded (forestry) rather than increased (the atmospheric commons, the ocean fisheries), and then, implicitly, saying that the happy outcomes in the first case mean that we shouldn't care about the bad outcomes in the second. Of course, that is wrong. Where technological change causes people to use their property rights in a way that benefits rather than harms other people, obviously there is no or little reason for government intervention. But where it has the opposite effect, there is. The existence of the first phenomenon does not imply that the second phenomenon does not exist.

A final point. The phrase "richer is greener" may be a reasonable description of the world, but I don't think it has any implications for policy. If some activity produces pollution, the usual prescription is to tax it so that the marginal cost of the activity equals the marginal benefit. The producer should stop the activity at the point at which an additional unit hurts society more than it helps it. The "richer is greener" slogan may seem to imply that in fact we shouldn't tax this activity. The tax will make us poorer—consumers pay more and shareholders receive less. If the tax is not imposed, we'll be richer and therefore (?) greener.

But the goal of social policy is not to make us richer but to make us better off, and when we prefer clean air over extra money, then the tax is justified. The only way I can make sense of the slogan is as a claim that richer people care more about the environment and voluntarily cut back on consumption, buy more green-friendly goods, and so forth; over the long term, more rich people mean a cleaner environment. As I noted before, rich people cause more environmental harm than poor people do. A McMansion uses more energy than a small apartment with leaky windows; a Prius uses more energy than a seat on a bus. But even if this claim were true, by hypothesis, the richer people are worse off than they would be if the tax had been imposed—they are actually poorer in a well-being sense as opposed to a monetary sense. Indeed, if the story about their preferences is true (and I remain skeptical), they will spend a lot of the money they save on taxes by traveling to places with clean air, purchasing oxygen supplies, and so forth, so they may be poorer rather than richer. I suspect that the story is a lot simpler here. In countries where people get their act together and manage to create and sustain high-quality institutions, these institutions (functioning court systems, non-corrupt legislatures, and so forth) adopt socially beneficial policies—including policies that both enable people to accumulate wealth and constrain activities that cause environmental harm.