Elsevier

Ecological Economics

Volume 65, Issue 2, 1 April 2008, Pages 432-440
Ecological Economics

ANALYSIS
Environmental productivity and Kuznets curve in India

https://doi.org/10.1016/j.ecolecon.2007.07.011Get rights and content

Abstract

As a result of India's extremely rapid economic growth, the scale and seriousness of environmental problems are no longer in doubt. Whether pollution abatement technologies are utilized more efficiently is crucial in the analysis of environmental management because it influences the cost of alternative production and pollution abatement technologies. In this study, we use state-level industry data of sulfur dioxide, nitrogen dioxide, and suspended particular matter over the period 1991–2003. Employing recently developed productivity measurement technique, we show that overall environmental productivities decrease over time in India. Furthermore, we analyze the determinants of environmental productivities and find environmental Kuznets curve type relationship existences between environmental productivity and income. Panel analysis results show that the scale effect dominates over the technique effect. Therefore, a combined effect of income on environmental productivity is negative.

Introduction

It has been a tough trade-off decision between economic growth and environmental protection especially in developing countries. Tireless efforts to accelerate economic growth had kept environmental considerations as secondary objectives in policy making in these countries. This indifference towards environmental protection has led to serious environmental problems in the developing countries and has threatened their sustainable future. For example, damage caused by pollution in India is estimated to cost $14 billion annually: amounting to close to 4.5% to 6% of GDP (Economic Survey of India, 1998–1999). In response, many developing countries have started enacting and implementing environmental policies in relation to air and water pollution and solid waste disposal to limit the severity of environmental degradation and the stringency of these regulations has been increasing over the years.

It has been increasingly recognized that technological progress can play a key role in maintaining a high standard of living in the face of these increasingly stringent environmental regulations. However, the extent of the contribution of technological progress depends on how well environmental policies are designed and implemented. Successful environmental polices can contribute to technological innovation and diffusion (Jaffe et al., 2003) while poor policy designs can inhibit innovation.

On the other hand, successful implementation of environmental regulations may crucially be linked with the pattern of economic growth. This argument is the basis of the environmental Kuznets curve (EKC) hypothesis, which has gained tremendous popularity among the researchers over the past decade. EKC draws its roots from the pioneering study by Grossman and Krueger (1993), which established the empirical relationship between measures of environmental quality and national income. An inverted U-shaped relationship of the EKC imply that environmental degradation increases with income at low levels of income and then decreases once a threshold level of per capita income is reached.

After the study by Grossman and Krueger (1993), many studies such as Seldon and Song (1994) and Holtz-Eakin and Selden (1995) had investigated this relationship for alternative measures of environmental degradation with levels of pollutants or pollutant intensities (see Dinda (2004), Stern (2004), and Managi (2006) for recent literature). There are studies that supported the EKC relationship between pollution and per capita national income. Their argument for such finding was that after a certain level of income, concern for environmental degradation becomes more relevant and a mechanism to reduce environmental degradation is put in place through necessary institutional, legal and technological adjustments.

However, a major criticism against these studies is that they have adopted a reduced form approach to examine the relationship between per capita income and pollution emissions (Stern, 1998). These two variables are merely the outcomes of a production process but they do not explain the underlying production process, which converts inputs into outputs and pollutants. In fact, the transformation of this production process may lead to environmental improvement at a higher level of income (Zaim and Taskin, 2000). Therefore, studies that examine the transformation of production process by quantifying the opportunity cost of adopting alternative environmentally superior technologies are more relevant to our study.

The more efficient utilization of pollution abatement technologies, at least in part, influences the cost of alternative production and pollution abatement technologies (e.g., Jaffe et al., 2003). An extensive body of theoretical literature examines the role of environmental policy in encouraging (or discouraging) productivity growth. On the one hand, abatement pressures may stimulate innovative responses that reduce the actual cost of compliance below those originally estimated. On the other hand, firms may be reluctant to innovate if they believe regulators will respond by ‘ratcheting-up’ standards even further. Therefore, in addition to the changes in environmental regulations and technology, management levels also affect environmental performance level or environmental productivity, which explains how efficiently pollutions are treated, defined by Managi et al. (2005). Thus, whether environmental productivity increases over time is an empirical question.1

Against this backdrop, the objective of this paper is two-fold; First, attempts are made to measure technological/productivity change for environmental (non-market) outputs of data of sulfur dioxide (SO2), nitrogen dioxide (NO2), and suspended particular matter (SPM) in India using state-level industry data over the period 1991–2003; second, the change in environmental productivity in different states are linked with their respective per capita income to find an EKC type relationship. We intend to measure environmental productivity following the traditional productivity literature.2 The regulations requiring more stringent pollution abatement do not necessarily change environmental productivity since the linear expansion of pollution abatement costs and pollution reduction does not necessarily change the pollution reduction per abatement cost.

The paper is structured as follows. Section 2 briefly reviews the environmental policies in India. The empirical model and data are explained in Section 3 while the results are presented in Section 4. The concluding remarks and further discussions are provided in Section 5.

Section snippets

Environmental policies in India

To combat the problem of environmental degradation, several environmental polices were initiated by the Government of India from late 1970s. India was the first country to insert an amendment into its Constitution allowing the State to protect and improve the environment for safeguarding public health, forests and wild life. The 42nd amendment was adopted in 1976 and went into effect January 3, 1977. The Directive Principles of State Policy (Article 47) requires not only a protectionist stance

Measurement of productivity

We measure productivity change in a joint production model, with a vector of market and non-market outputs using production frontier analysis (see Kumar (2006) for the literature). This approach uses the Luenberger productivity index, which is the dual to the profit function and does not require the choice of an input–output orientation (Chambers et al., 1996).3

Productivity analysis

Separate frontiers are estimated for each year, and shifts in the frontiers over time are used to measure the technological change. The arithmetic mean of the Luenberger productivity indices for each state in each year5 are estimated under the assumptions of VRS production technologies. Note that we also estimate the productivities under the assumptions of constant returns to scale and find similar

Concluding remarks

As a result of India's extremely rapid economic growth, the scale and seriousness of environmental problems are no longer in doubt. Whether pollution abatement technologies are utilized more efficiently is crucial in the analysis of environmental management because it influences the cost of alternative production and pollution abatement technologies, at least in part (e.g., Jaffe et al., 2003). Using recently developed productivity measurement technique, we show that overall environmental

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    The authors thank two anonymous referees for their helpful comments, and also thank Yutaka Ito for his assistance. This research was funded by the Yokohama National University, and Grant-in-Aid for Scientific Research (B) from the Japanese Ministry of Education, Culture, Sports, Science and Technology (MEXT), No.70372456. The results and conclusions of this paper do not necessarily represent the views of the funding agencies.

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