Is Environmental Protection Beneficial for the Environment?

• Date: 01 August 2017
• DOI: http://doi.org/10.1111/rode.12267
• Published date: 01 August 2017

Is Environmental Protection Beneficial for the

Environment?

Alberto Ansuategi and Simone Marsiglio*

Abstract

We analyze a simple endogenous growth model with environmental interactions. Economic production

generates emissions of pollutants whose environmental impact is mitigated by abatement activities

financed by government expenditure; environmental quality affects preferences but does not play any

productive role. We show that government intervention, by reallocating resources from capital

accumulation to environmental preservation activities, allows the economy to achieve a sustainable

balanced growth path. Along such a path, softer environmental policy regimes lead to win–win outcomes,

fostering economic growth and improving environmental quality. Such a result needs to be interpreted as

a long run outcome, but it clearly shows that the compatibility between economic growth and

environmental improvement is far from automatic. Indeed, in the long run it could paradoxically be the

case that both the economy and the environment benefit from low levels of environmental protection.

1. Introduction

In the last two decades there has been a growing interest in understanding the links

between the effort devoted to reduce the undesirable side effects of human

activities on environmental quality and the economic performance of nations,

industries and firms. Since the early 1990s much attention has been placed on the

“win–win” opportunity advanced by Porter and van der Linde (1995), stating that

stricter environmental regulation would result in environmental benefits and

increased competitiveness. The so-called “Porter hypothesis” has given rise to

important theoretical controversies and has spurred an extensive empirical

literature on the effects of environmental regulation on innovation producing

inconclusive (and contested) results.

1

However, despite the richness of the academic

debate, the translation of this debate into the policy arena has been disappointingly

simplistic. Thus, the recent United Nations Conference on Sustainable Development,

named Rio+20 (United Nations Environment Programme (UNEP), 2012) and,

more recently, the 2030 Agenda for Sustainable Development (UN, 2015), have

arrived at a moment when political and economic leaders have embraced

unanimously and with breathtaking enthusiasm green growth strategies aiming at

fostering economic growth and development, while ensuring that natural assets are

used sustainably and continue to provide the resources and environmental services

*Marsiglio (corresponding author): University of Wollongong, School of Accounting, Economics and

Finance, Northfields Avenue, Wollongong, 2522, NSW, Australia. E-mail: simonem@uow.edu.au.

Ansuategi: University of the Basque Country, Department of Foundations of Economic Analysis I and

Institute of Public Economics, avenida Lehendakari Aguirre 83, 48015, Bilbao, Spain. The authors are

grateful to Ilaski Baranano and Fabio Privileggi for insightful discussions and comments. They also wish

to thank the participants to the seminar held at JCU and the ANZSEE 2012 conference (Gold Coast,

QLD, Australia) for their helpful advice and suggestions. All remaining errors are the sole responsibility

of the authors. Alberto Ansuategi gratefully acknowledges financial support from Spanish Ministry of

Science and Innovation (grant ECO2011-25064) and the Basque Ministry of Education, Universities and

Research (grant GIC07/56-IT-383-07).

Review of Development Economics, 21(3), 786–802, 2017

DOI:10.1111/rode.12267

©2016 John Wiley & Sons Ltd

that our wellbeing relies upon (Organisation for Economic Co-operation and

Development (OECD), 2015).

The green growth discourse among policymakers is still in a preliminary phase,

but eventually its success can have two different types of interpretation. The

optimistic interpretation would consider it as a signal that a new consensus is

emerging on the fact that economic growth and environmental quality are in many

respects complementary. The pessimistic interpretation would underline that in

Public Administration rhetoric devoting more resources to environmental

protection is wrongly interpreted as a sufficient condition to ensure higher living

standards and a healthier environment. The search for “silver bullets” to address

environmental and economic challenges at the same time has also been present in

the policy prescriptions designed to face the current global economic (and

environmental) crisis. Thus, many governments announced stimulus measures in

response to the financial crisis of 2007–2008, and sizable portions of these stimulus

packages were directed at environmental goals (International Institute for Labour

Studies (IILS), 2011). These green stimulus measures have also been interpreted as

“win–win” policies: meant to stabilize the economy and improve environmental

quality.

It is beyond the scope of this paper to discuss the validity of the “win–win”

nature of such policies. Instead, we want to illustrate in a very simple theoretical

framework that the compatibility between economic growth and environmental

improvement is far from automatic and that in the long term it could paradoxically

be the case that both the economy and the environment benefit from a lower level

of environmental protection, but again, we do not want our reasoning to be

misinterpreted. This theoretical result does not lend support to the argument that

(too much) environmental protection does hurt both the economy and the

environment. We just want to point out that some forms of environmental

protection could lead us in the long term to lower levels of consumption and

environmental quality and, therefore, lower levels of welfare. It should be noted

that environmental protection comprises a wide array of different measures, some

more “reactive” (i.e. treatment of waste-water and effluence) and others more

“proactive” (i.e. R&D aiming at reducing energy/emission intensity of production/

consumption activities). If the main responsibility of an Environmental Protection

Agency (EPA) is to abate pollution in order to compensate for a reduction in

nature’s capacity to provide ecosystem services (and this is the role it will play in

our illustrative and simplified model), it may well be the case that those economies

with higher levels of environmental protection expenditure will experiment with

lower rates of economic growth and lower levels of environmental quality in the

long run. This is because in these economies the EPA will be basically substituting

ecosystem services provided by nature with environmental goods and services that

will require the use of resources that cannot be directed to other productive

activities.

In order to show our point in the clearest possible way, we focus on the simplest

endogenous growth model used in the literature to investigate the relationship

between environmental policy and economic growth, that is, a one-sector model

with abatement activities financed by a central authority. In the last decade much

progress in the analysis of the mutual implications between growth and the

environment has been made (see Xepapadeas, 2005, for a survey). Here we briefly

discuss a strand of such a literature, the subset employing one-sector endogenous

growth models, which is most closely related to our approach, focusing in particular

IS ENVIRONMENTAL PROTECTION BENEFICIAL? 787

©2016 John Wiley & Sons Ltd