Environmental turning points, institutions, and the race to the top.

• Author: Yandle, Bruce

The phrase environmental turning point took on a new meaning in 1991 when Gene Grossman and Alan Krueger (1991, 1995) unveiled the first empirical Environmental Kuznets Curves (EKCs). As shown in figure 1, a hypothetical EKC for sulfur dioxide, the peak of the curve is a turning point that separates two distinct income-environment relationships: to the left of the peak, air quality deteriorates with rising income; to the right, air quality improves with rising income. The first portion of the EKC represents a "race to the bottom" in which rising income hastens environmental decay. The portion to the right of the peak describes a "race to the top" in which higher income is associated with better environmental quality.

As might have been expected in a world where no silver bullets exist to remedy every imaginable problem, not every environmental dimension examined by Grossman and Krueger conformed to this happy turning-point model. Still, their 1991 EKC identification established a baseline argument that somehow the route to higher income may also be a path to improved environmental quality.

Since the publication of Grossman and Krueger's 1991 article, more than a hundred empirical EKC studies have been added to the professional literature (Yandle, Vijayaraghavan, and Bhattarai 2004 forthcoming). (1) EKC estimates now exist for numerous elements of water pollution, including levels of dissolved oxygen, fecal coliform, nitrates, and arsenic; for hazardous materials; and for forestation/deforestation, among other things (Yandle, Vijayaraghavan, and Bhattarai 2002).

The studies, which are primarily cross-sectional, include some time-series estimates. In some cases, the research replicates and supports the Grossman-Krueger findings. In other cases, the turning points are not observed. As comforting as turning points may be to those who prize both environmental quality and the other benefits that come with higher income, however, EKCs themselves do not tell us how the crucial turning points emerge--that is, how a race to the bottom becomes a race to the top. Stories of human action lie hidden within the data. We know that property rights, market threes, and political actions that specify how the environment is used make a difference in outcomes (Coase 1960; Becker 1983; Libecap 1989; Anderson and Leal 1997). We do not understand fully how the advent of a race to the top is associated with changes in the rules for managing environmental quality.

To illustrate, consider the case of water quality. Every point on a statistical EKC marks a level of income and, let us say, the amount of dissolved oxygen in the water at a specific location on a river. Each of these points is associated with a state of scientific understanding and an institutional framework that affects environmental use; for each point, some form of property rights and regulations (including no property rights and regulation at all) may constrain or allow environmental use. For example, at one income level a community may allow unregulated fishing, swimming, and drinking from a river that passes through the community. These uses may be based on custom, tradition, and tribal rights (Ostrom 1990). The effectiveness of the rules and the forbearance that community members exercise determine the resulting water quality. At another EKC point for the same community, where higher income and new knowledge generate new demands and make more costly institutions affordable, a system of common-law rules enforced by government-operated courts may control use of the same river segment. Ownership of riparian land gives rightholders access to the courts when other parties violate their environmental rights without having gained the owners' permission to do so. At yet another, higher income point on an EKC, a system of government command-and-control regulation may have either supplanted or augmented the earlier common-law system.

All across a given community EKC, different levels of water quality become associated with different levels of income and the accompanying rules for managing the river. In other words, a third dimension, an institutional dimension, needs to be taken into account. In some cases, the rules for use remain unchanged as incomes rises, but higher income enables increased monitoring and enforcement of the rules. In other cases, new rules, statutes, and regulations for managing water quality are put into effect.

Given that the different rules generate different outcomes, we need to understand how changes in rules come about. Can we find actual stories of successful efforts to alter property rights? Which set of rules can the community sustain most successfully? Knowing more about how changes in environmental rules occur and about the traits that cause rules to survive, we may be better able to identify institutions that accelerate the race to the top.

In this article, I discuss environmental turning points, the agents of change that contribute to the turn, the rules that accompany a race to the top, and the rule characteristics that sustain the race. In the next section, I review EKCs, focusing on turning points and the race to the top. Then, I develop a set of characteristics associated with self-sustaining environmental-management institutions. Stories about institutional change and human action come next, and rule sustainability is discussed at the end of each story.

EKCs and the Race to the Top

EKCs gained prominence in 1995 when the North American Free Trade Agreement (NAFTA) became the focus of national debate. NAFTA opponents marshaled arguments that included concerns about environmental quality. Indeed, American steelworkers put on "Bootlegger and Baptists" clothing to argue not about job losses that might occur with open borders but about water quality and air quality in Mexico (Yandle 1993). Exhibiting profound concern about Mother Earth, the union and others, notably the Sierra Club, argued that lax Mexican environmental standards would generate a sucking sound as U.S. industry was siphoned off to attractive pollution havens. NAFTA's result, from these critics' point of view, would be environmental decay as well as diminished American industrial prosperity.

Although some parties argued passionately about these matters, Grossman and Krueger decided to "count the teeth." Gathering World Bank data on several common measures of environmental quality for a large sample of countries, they related the pollution measures to gross domestic product (GDP) per capita and reported the first EKC. When data for sulfur dioxide and total suspended particulates were considered, their results showed an income turning point after which pollution diminished with growing income. In 1985 dollars, the GDP per capita turning point lay in the $4,000-5,000 range, depending on the pollutant considered. It so happened that the turning point was close to Mexico's GDP per capita. Their results offered a bit of empirical support of NAFTA's relative merits and launched a veritable cottage industry of academics crunching numbers in an effort to identify the strengths and weaknesses of the EKC concept.

Figure 1 describes the general EKC form. When GDP per capita is low, human communities apparently trade off certain forms of environmental quality for income. Arguably, increased life expectancy, the advent of leisure time, and the desire to consume environmental quality, instead of transforming it, lead to the turning point, after which further income increases become associated with increased environmental quality. In the benign part of the curve, the environment shifts from being treated as a sink for disposing of wastes to becoming a source of greater direct consumption value (enjoyment) to the community.

Figure 2 presents an EKC for sulfur dioxide estimated by Xiang Dong Qin (1998). This estimate used balanced panel data for fourteen countries over three time periods. The estimating equation that generated the EKC in figure 2 contains an adjustment for property-rights protection (Knack and Keefer 1995). When protection is stronger, as shown by the dashed curve, the EKC's peak is not as high: communities with stricter property-rights protection do not allow as much environmental degradation. To say that the environment is less degraded where property rights are more secure is not to say that environmental property rights exist. In fact, where individuals can own and transfer real property and gain the profits from doing so, those same individuals do more to see that air quality, water quality, and other environmental assets are maintained or improved. Environmental improvements become capitalized in the value of land when secure property rights in land can be sold.

Qin (1998) also estimated EKCs for water quality. With data on the level of dissolved oxygen for the cleanest river in each of a panel of countries, the estimate generated an income turning point much lower than that for air-quality data: evidently, the communities examined assigned more importance to cleaner water than to reduced levels of sulfur dioxide when incomes were low.

Sustainable Rules

Often, it seems, some pending or actual environmental catastrophe generates an institutional response that inspires human action that in turn gives rise to the turning point. Smog over Los Angeles in 1943, typhoid epidemics in the Ruhr basin...