Most studies of sustainable development have paid little attention to its links with mainstream macroeconomics, but recent theories of economic growth, fiscal policy and the open economy have major implications for sustainability. A CEPR conference with the OECD Development Centre on `Sustainable Economic Development: Domestic and International Policy', held in Paris on 24/25 May, brought together academics and research economists from international organizations. It offered new insights for environmental economics by injecting an economy-wide dimension to what has normally been a microeconomic debate. The conference was organized by Ian Goldin, Senior Economist at the World Bank and former Programme Head at the OECD Development Centre, and L Alan Winters, Professor of Economics and Head of Department at the University of Birmingham and Co-Director of CEPR's International Trade programme.

The papers fell into four sub-themes: the measurement and evaluation of costs and benefits of abatement, spatially and over time; the current empirical evidence linking growth and emissions; the lessons to be learned from developing country experience through two country studies; and the scope and limits of international cooperation, in theory and in practice.

Costs and Benefits of Abatement
In `What Sustains Economic Development?', Maurice Scott (Nuffield College, Oxford) defined economic development conventionally as the growth of per capita income. Maintenance costs must be deducted from income, however, since conventional accounts do not properly measure some forms of environmental deterioration. Scott noted significant concerns about the limits to growth, but he maintained that the world can cope with the resulting environmental problems. While such maintenance costs are likely to increase, they will remain a small share of world output, although they will generally require government intervention and cannot rely on private decision-making. Scott noted also that political stability is a prerequisite for growth, and it must be accompanied by policies that do not impede growth through excessive taxation, by inhibiting investment or rendering it inefficient in other ways.

Constantino Lluch (OECD) found Scott's paradigm (`investment plus employment leads to growth') was more useful to policy-makers, than the traditional paradigm (`growth leads to employment'). Many participants stressed institutional features that impede or enhance growth; for example John Martin (OECD) emphasized the role of national boundaries and sovereignty. Geoffrey Heal (Columbia University) noted that Scott had ignored discounting, and he was particularly concerned about the evaluation of very long-term benefits and costs.

In `Optimal Development and the Idea of Net National Product', Partha Dasgupta (St John's College, Cambridge, and CEPR) related recent work on environmental determinants of sustainable development conducted in the wake of the Brundtland report to the older literature on optimal development, which takes greater account of theories of distributional justice in the formulation of optimal public policies. Dasgupta discussed criteria for optimality and the implementation of optimal policies for the management of environmental (renewable natural) resources that are in danger of exhaustion through overuse. He maintained that `net national product', which is defined to abstract from information, transaction and institutional constraints, may provide the most suitable objective function for this purpose. Its implementation will require both the determination of an appropriate set of accounting (or `shadow') prices and a proper evaluation of environmental or natural resources.

Philippe Aghion (EBRD and CEPR) questioned Dasgupta's strong assumptions concerning convexity and the stationarity of credit markets and institutions. Also his representative agent approach took no account of distributional issues and said little about policy implementation, for example, the role of governments.

Andrea Beltratti (Università di Torino and Fondazione Eni Enrico Mattei, Milano), Graciela Chichilnisky (Columbia University) and Geoffrey Heal then presented `Sustainable Growth and the Environment', in which they developed a formal analytical framework to study long-run sustainability in the use of natural resources. By characterizing the growth paths that are `optimal' in this context and relating them to more traditional utilitarian criteria, they investigated the trade-offs that arise from an explicit consideration of sustainability. They used this framework to rank alternative growth paths in relation to the use of natural resources in the very long run and the welfare of generations living very far into the future.

Alistair Ulph (University of Southampton and CEPR) remarked that the specification of their model was restrictive, and a generalization could lead to more conventional results; nor did it take any account of non-renewable resources. Gene Grossman (Princeton University and CEPR) noted the importance of technical innovation and the role of knowledge. Sweder van Wijnbergen (Universiteit van Amsterdam and CEPR) agreed and noted, for example, the link between the effect of higher air quality on children's IQ and its subsequent effect on growth.

Growth and Pollution
The next two papers described the current state of the empirical evidence linking economic growth with the growth of emissions and other pollution variables. In the first, `Does Sustainability Require Growth?', Richard Baldwin (Graduate Institute of International Studies, Geneva, and CEPR) argued that growth is essential to sustainability. Poverty leads to population growth rates that are unsustainably high, while poorer countries are entering a phase of economic development associated with high levels of pollution. Pollution abatement will increase in turn with income, as the composition of output shifts from manufacturing to less polluting services and demand for abatement increases. Baldwin provided empirical evidence of this `bell-shaped' curve of per capita emissions as a function of income. He concluded that countries need to reduce population growth rates, in particular fertility rates, while pollution abatement in developing countries is essential and should be provided by technology transfer.

Daniel Cohen (Ecole Nationale Supérieure, Paris, Université de Paris I and CEPR) noted that total pollution may continue to increase even if population growth and per capita pollution both fall with an increase in per capita output. Participants expressed optimism concerning technology transfer on account of the potential for increasing returns to scale in abatement technology; for example, developing countries that adopt unleaded gasoline will incur lower costs than the industrialized countries did at comparable levels of development. Several participants noted the role of institutions: the absence of social security or female education may account for the high birth rates in many countries.

Gene Grossman then presented `Pollution and Growth: What Do We Know?', arguing that pollution need not grow with economic output since the composition of output changes and production technologies evolve over time. He used several data bases (Global Environmental Monitoring System, World Resources Institute and Aerometric Information Retrieval System) to estimate the relationship between per capita income and pollution emissions for a wide range of both air and water pollutants including suspended particulate matter, lead, sulphur dioxide, carbon monoxide, nitrous oxides, carbon dioxide, pathogenic contamination of water, heavy metals and toxic chemicals and water oxygen levels. He found that some pollutants declined monotonically with increasing income, while others exhibited a bell-shaped pattern, and for some there was no evidence that emissions decline with income. Pollutants with `local' effects tended to decline quickly with income, while those with `global' effects did not. Grossman concluded that the relationship between higher income and pollution abatement is by no means automatic and generally requires policy action by governments. Nor is there any reason to believe that developing countries have to follow the same pattern of development (and incur the associated environmental costs) as the industrialized countries. Learning processes and technology transfer will lead to a different, lower path of pollution emissions.

Gilles Saint-Paul (Département et Laboratoire d'Economie Théorique et Appliquée, Paris, and CEPR) expressed concern that estimates derived from domestic data may overlook international spillovers of environmental damage. Andrew Steer (World Bank) suggested that changes in production technology play a greater role in reducing emissions than those in the structure of output. Several participants called for more theoretical work as well as case-studies to move away from reduced form analysis.

Country Studies
Two country studies highlighted practical policy lessons. In the first, `Economic Policies for Sustainable Resource Use in Morocco', David Roland-Holst (OECD) and Ian Goldin examined the sustainability of water use in Morocco's economy. Morocco currently has sufficient supplies at the national level, but there are large regional variations, and significant shortages are likely in the next 30 years. Water is supplied at prices well below cost, and agriculture consumes over 90% of aggregate water consumption. The authors presented an applied general equilibrium model of the Moroccan economy, with water entering as a factor of production, to show that the reform of water pricing policies would significantly reduce its consumption, but this would be detrimental to the economy as a whole. The latter is severely distorted, however, particularly in its trade regime, and the joint reform of trade and water pricing could improve the efficiency of water use and raise income.

Jaime de Melo (World Bank, Université de Genève and CEPR) questioned the role of the infinitely elastic water supply, in terms of both its effect on the policy implications and its use in determining the value of GDP. Other participants expressed concern about income distribution, the implementation of water control measures (metering), and generalizations of the policy lessons to other developing countries.
Rosemary Clarke (University of Birmingham) and L Alan Winters then presented `Energy Pricing for Sustainable Development in China', in which they discussed optimal abatement policies at the national and global levels and described the current state of pollution in China and the institutional and market structures that affect the costs and benefits of abatement. They developed an applied general equilibrium model which incorporated the salient features of the Chinese economy concerning energy use government procurement, the dual pricing system and energy prices that are significantly below marginal cost and world prices. Clarke and Winters presented the results of several policy simulations including a reduction of subsidized sales of energy to industry and to final consumers and the imposition of a carbon tax on market sales. Because of the significant distortions in China's energy sector, they found that a `no-regrets' policy to reduce existing distortions would yield greater benefits than the imposition of a carbon tax.

Many comments revolved around the model's base data, since 1985 was considered a bad base year for modelling the Chinese economy, which has evolved rapidly since then, particularly with respect to the share of government sales. Several participants noted that China's strong institutions could enable it to deal with environmental problems. Integrating the benefits from reduction of emissions into the analysis, particularly for `local' pollutants, could lead to greater Chinese cooperation in achieving a global accord on emissions control.

International Cooperation
The remaining three papers focused directly on international cooperation. In the first, `Carbon Abatement, Transfers and Energy Efficiency: Evidence from GREEN', Jean-Marc Burniaux, John P Martin, Joaquim Oliveira-Martins and Dominique van der Mensbrugghe (OECD) used a global, dynamic, applied general equilibrium model developed at the OECD (known as GREEN) to analyse the effects of various carbon/energy tax policies on income, trade and carbon emissions. They first considered a measure of the `Autonomous Energy Efficiency Improvement' which they found must take implausibly high values in order to stabilize carbon emissions by the middle of the next century. They then presented two simulations of the joint implementation of global carbon abatement policies. First, imposing an OECD-only carbon tax and partially recycling the revenues to new investment in the non-OECD countries produced a relatively modest reduction of emissions, since foreign investment accounts for only a small share of the total. Second, imposing a more modest but global tax, with a similar recycling of the resulting revenues from OECD to non-OECD countries, significantly reduces global emissions and has an overall positive impact on non-OECD real incomes.

Lucrezia Reichlin (Observatoire Français des Conjonctures Economiques, Paris, and CEPR) questioned the transfer mechanism and called for sensitivity analysis. She also suggested incorporating the benefits of abatement into the evaluations of welfare. Many participants recognized the limitations of applied general equilibrium modelling, but there was a consensus that changes in technology and the capital stock will not suffice to stabilize emissions, so there is need to look at other mechanisms such as a carbon tax.

In the next paper, `Policy Coordination for Sustainability: Commitments, Transfers, and Band-Wagon Effects', Carlo Carraro (Università di Venezia and CEPR) and Domenico Siniscalco (Università di Torino and Fondazione Eni Enrico Mattei, Milano) considered global externalities and the instability of coalitions to achieve international agreements due to the presence of free-riding. Previous models have shown that small coalitions tend to have many free-riders while larger ones entail agreements that lead to inefficient outcomes. The authors introduced two elements which can produce larger and more stable coalitions. First, self-generated cash transfers may entice new members into the coalition, but this will require a small subset of the coalition to make some level of commitment. Second, technological cooperation may play an additional role by creating a positive externality that offsets the incentive to free-ride and can often lead to large, profitable and stable coalitions.

Marcus Miller (University of Warwick and CEPR) stressed that positive externalities may be found in abatement technology itself, and there is no need for technological cooperation in other facets of production. He also suggested incorporating explicit charges for emissions which could lead to more efficient outcomes and generate revenues for R&D.

In `Environmental Regulation, International Competition and Foreign Direct Investment', joint with Ravi Kanbur and Michael Keen, Sweder van Wijnbergen used a two-country model of trade and investment to analyse the consequences of integration in the presence of asymmetries in size and environmental standards. His results supported the views of both industrialists who complain about unfair competition from countries with laxer environmental standards and environmentalists who are concerned that trade can circumvent environmental controls. Without international coordination, wasteful competition will reduce environmental standards as both countries allow more pollution than either would prefer, and the extent of such competition increases with the difference in their size. Van Wijnbergen then showed that harmonization of standards will always leave the small country worse off, and if standards are set low enough the large country may also lose. A preferred solution is to set a minimum standard that prevents wasteful competition and allow each country to set its own standard at or above this agreed minimum. The welfare benefits of international coordination on minimum environmental standards increase with the inequality of the countries' size or stage of development, the degree of their economic integration and the extent of pollution spillovers between them.

Jean-Claude Berthélemy (OECD) cited the example of Japan to question the empirical significance of the costs of environmental regulations in firms' location decisions; governments also have a wider range of policy options than environmental regulations, including tax instruments.

Summarizing the meeting, Gene Grossman listed four policy lessons from the presentations. Countries must set their prices correctly, including those of environmental resources; economies are operating in a second-best world in which environmental policies may reduce or increase distortions in other sectors, whose liberalization may in turn have detrimental or beneficial impacts on the environment; domestic changes appear to be achieved more easily than international agreements; and some of the conditions for international cooperation have been set out. Grossman suggested conducting further research into endogenizing technological progress, developing more environmental policies such as tradable permits, the political economy of environmental policies, and the linkages between trade policy and the environment. In his concluding remarks, Colin Bradford (OECD) welcomed the empirical analysis indicating that growth and sustainability may be consistent, and he called for further research on policy instruments, in particular market instruments rather than command and control, and on the roles of innovation in both technology and institutions.

'The Economics of Sustainable Development' edited by Ian Goldin and L Alan Winters.
Published by Cambridge University Press.
ISBN (hardback) 0 521 465555 9
ISBN (paperback) 0 521 46957 0