Economic growth and environmental sustainability are two of the most widely discussed topics today. While both of these issues are extremely important and cannot be easily prioritised over one another, it is widely believed that trying to solve one issue can only negatively impact the other. The crucial nature of maximising economic growth and achieving environmental sustainability where GDP remains “3.1% below pre-pandemic levels”, and the “net damage costs of climate change are likely to be significant and to increase over time”, makes balancing these objectives particularly relevant today.

The decision to either prioritise economic growth or the environment presents a modern-day dilemma to climate activists and policymakers. The conventional wisdom is that economic growth and environmental preservation tend to be competitive over the short and long term because the use and extraction of finite resources, which is essential to economic growth, inevitably causes environmental damage. However, there is compelling evidence to show that they can actually be complementary in the long term. This debate continues to rage, with many studies agreeing and disagreeing on whether this relationship either coexists or contradicts in the long term.

The case for the economy and the environment being competing priorities in the short term

The chart below shows that economic growth and environmental sustainability have not previously coexisted. In today’s world, there is particular emphasis on increased output and enabling as much consumption as possible. Assuming economic growth continued at its current pace, these costs would inevitably have irreversible adverse effects on the environment that could be reminiscent of those faced in the UK’s Industrial Revolution, which spanned from (1760-1830). While the Industrial Revolution resulted in innovation and economic growth, it also caused a significant increase in environmental damage, coming particularly in the form of carbon emissions.

The chart below shows the cumulative carbon emissions produced in the UK from 1750 to 2019. As the Industrial Revolution began, carbon emissions started to increase. Beyond the end of the Industrial Revolution, we can see the effect of globalisation and modernisation, and how the nation’s rapid economic growth boosted carbon emissions. As much of the economic development arose out of the advances of steam-powered turbines and later electricity, this correlation strongly suggests that growth has been dependent on environmental exploitation.

Cumulative curve of carbon dioxide emissions produced in the United Kingdom

Source: Statista

However, the chart below from the ONS (Office for National Statistics) suggests an inverse relationship between economic growth and carbon emissions in the United Kingdom in recent years. While “Real GDP per head grew by 70.7%, carbon dioxide emissions declined by 34.2%.” This chart contrasts with the chart above, suggesting that cumulative carbon dioxide emissions will always go higher, but over time, the economy has grown while annual carbon dioxide emissions have gone down.

The case for the economy and the environment being competing priorities in the long term

These three theories below model the relationship between environmental damage and GDP/Capita. All of these models describe the possibilities of the economy growing, which result either in more environmental degradation, the economy shrinking due to efforts to reduce environmental damage, or a slowdown and end to pollutants and emissions.

The first model, the “New Toxics Theory”, argues for a linear relationship between the environment and economic growth. It suggests that as the economy grows, environmental degradation increases linearly due to a rise in emissions. The theory suggests that while technology could help lower the damage of existing pollutants, more consumption will inevitably result in more being extracted from the earth and ultimately lead to faster environmental deterioration.

The “Limits Theory” contradicts the idea of a complementary relationship between economic growth and the environment. According to this theory, if one were to focus on growth to deliver environmental outcomes, it could cause catastrophic damage and ultimately be counter-productive. The “Limits Theory” states that the relationship between environmental damage and GDP/Capita could deteriorate so that the economy could contract because of the environmental damage caused by economic growth, hence the downward curve in the relationship. For example, environmental damage due to the single-minded pursuit of economic growth could destroy habitats and contribute to species extinction. These habitats or species might’ve been vital for food production or protection against natural disasters, meaning their damage also harms future economic performance.

The “Race to the Bottom” model describes the relationship between economic growth and the environment as flat as economies grow. This model considers that larger developed-market economies may implement new policies to reduce their environmental impact. However, not mentioned in the model is the idea that as they grow and appear to reduce emissions, countries may start to push production to poorer, less developed countries in earlier stages on the curve. This model suggests a best-case scenario of a situation under which we do not improve environmental quality or degrade it further.

Ex 1.0: New Toxics Theory                     Ex 1.1: Limits Theory                      Ex 1.2:  Race to the Bottom

Source: ”Economic Growth and the Environment” (Tim Everett, Mallika Ishwaran, Gian Paolo Ansaloni and Alex Rubin, 2010)

The case for economic growth and the environment being complementary in the long term

Ex 1.3 below is the “Environmental Kuznets Curve” model, with environmental damage measured in air pollution emissions. The model shows emissions rising with GDP until a certain point where further increases in GDP reduce emissions. The expansion in GDP leading to a reduction in emissions may come from a desire to reduce pollution. This objective has less appeal for lower-income nations as they are incentivised to utilise their limited funds to satisfy their essential needs. However, at the peak of the curve, there begins to be a trade-off. When this level of income is achieved, people begin to be more likely to prioritise environmental quality, as they are less focused on economic growth and more on non-material living standards. It is at this point where environmental damage increases at a lower rate. After a point, individuals prefer improvements of environmental quality over progress in economic growth and recognise the severity of emissions on the environment. Investing in the prospects that lead to environmental sustainability, people lean toward advancements of environmental quality and recognise levels of the damage. As we invest more aggressively in protecting the environment, future damage is limited and can even improve alongside GDP/Capita growth.

Technological progress is another possible factor that could explain the shape of the curve. During the early stages of their life cycles, companies tend to focus on increasing production. However, as these companies evolve, they invest more into environmental sustainability, and in some cases, vow to go carbon neutral. Additionally, developed economies tend to have more advanced technology which is more efficient, making it much more sustainable. These factors would allow for a nation that increases GDP/Capita while lowering environmental damage.

Ex 1.3: The Environmental Kuznets Curve

Source: ”Economic Growth and the Environment” (Tim Everett, Mallika Ishwaran, Gian Paolo Ansaloni and Alex Rubin, 2010)

The role of environmental policy in a long-term complementary approach

The Kuznets Curve model cannot be assumed to happen simply through economic growth, but must also be coupled with effective environmental policy. Successful policy is central to sustainable protection of the environment, and can also be a key driver for economic growth, thereby benefiting all of society.

Furthermore, studies have shown that the government has a vital role in incentivising and driving green innovation through environmental policy. One study by Alastair Reid and Michal Miedzinski states that “The underlying rationale of innovation policy is to improve the competitiveness of the economy and, consequently, contribute to higher economic growth and employment.”

Other studies have also shown that innovation can also be achieved through a combination of government regulation and active environmental policy. Companies should invest aggressively in R&D to develop environmentally sustainable ways to conduct business. There is a significant positive relationship between regulatory compliance expenditures and R&D expenditures by the regulated industry when we control for industry-specific effects,” and “environmental regulation will stimulate certain types of innovation.”

In the end, a scenario for a long-term complementary relationship between economic growth and the environment can be modelled by the Kuznets Curve, and in practice, by the chart from the ONS showing the relationship between Real GDP per head and carbon emissions. The Kuznets Curve theory can only work for nations whose governments implement effective environmental policies to encourage corporations to innovate and pursue environmental sustainability.

Moreover, as the Kuznets Curve model shows, they are complementary in the long term, and research shows that as the economy grows, environmental regulation and R&D will lead to innovation. Thus, when environmental policy is implemented effectively, economic growth and the environment can be complementary.