Economic Development and the Environment

From the Editor

The relationship between economic development and environment always remains a controversial issue. Economic development is a function of technological improvements and increases in capital stock. Besides, economic development is associated with the increasing provision of energy and intensive uses of natural resources which have as consequences higher pollution levels and gradually less capacity of the environment to absorb wastes.

Nowadays, the interrelationship between economy and environment becomes more prominent. Due to the fact that wants and desires are unlimited, and natural resources are mostly limited, we face the problem of scarcity. In Economics we study the appropriate allocations of scarce resources, while in Environmental and Natural Resource Economics we refer to the interactions between humans and environment. To sustain a healthy and functioning environment over a long time period sustainable economic development is required to satisfy the current demand and needs and at the same time to respect demand and needs of the future generations. This in turn requires that the satisfaction of human needs is achieved without the extinction of natural resources with no large increases of pollution and no irreversible environmental damage.

The concept of sustainable development attempts to combine economic and environmental goals. Sustainable development may be defined as a continuous improvement in the socio-economic standards, fulfilled by increasing its stocks of physical and human capital, as well as improving the standards of technology together with the health of the environment. In order to guarantee the sustainable development of the economy, environmental degradation should not be increased with time but to be reduced or at least to remain constant.

On these lines, the environmental Kuznets curve (EKC) hypothesis relies on this idea and proposes that there is an inverted U-shaped relationship between environmental degradation and per-capita income. Empirical formulations of the environment-income relationship and the exploration of the EKC hypothesis rely on econometric specifications that consist of an environmental damage indicator as dependant variable. This indicator depends on an economic variable representing economic development like GDP/c in level, square and cubic values used as independent variables. Due to lack of data different variables have been used so far in empirical modeling to approximate environmental damage like air pollutants (SO_X, NO_X, CO₂, etc.), water pollutants (e.g. toxic chemicals discharged in water, etc.) and other environmental indicators (e.g. deforestation, municipal waste, urban sanitation and access to safe drinking water). The concept of the EKC hypothesis is discussed in some of the chapters of this book.

Having this in mind, the main goal of this book is to investigate interactions between economic development and the environment and their implications for moving towards a sustainable development. It also seeks ways and means for achieving sustainability. For this reason, the development and application of indicators, as well as, the implementation of policies for sustainable development are explored.

The book consists of 10 chapters. The first chapter by Charles Perrings considers the problems of overharvesting and marine systems’ pollution. Due to technological improvement and the large increase in world population the available limited natural resources are being used in a very intensive way. This had driven to overexploitation of natural resources with various problems for the environment like overfishing. The influence of institutions in each case is reviewed and the options for reform are discussed. This is really an innovative chapter describing the way economists take into consideration the economics of optimal extraction of marine resources together with optimality in wastes’ discharge of these pollution externalities in marine systems.

As already mentioned, sustainable economic development is necessary in order to satisfy the current demand and needs of the society respecting demand and wants of the future generations. The second chapter by Shunsuke.Managi, Zheng Zhang and Shinya Horie, discusses the issue of the development of novel products to satisfy the desires and anticipations of matured consumers, as the main way that firms may adapt in order to survive in the increased international conflict. Creativity or innovative efforts may permit firms to compete quicker and in the direction they prefer. For this reason this study evaluates a system of real options approach (ROA) to a biomimicry R&D project together with traditional R&D and environmental R&D projects. Uncertainties in investment cost and cash flows of the new product in each project are considered and it is shown that investments on environmental and biomimicry methods will result to promising expectations in Asia.

The following two chapters rely on the concept of the EKC and the inverted U-shaped relationship between environmental degradation and per-capita income. Specifically, the third chapter by Sergio Destefanis, Fabio Eboli and Maria Carmen Papaleo analyzes the eco - efficiency for 103 provincial (NUTS 3) Italian capitals throughout 2000-2008 concentrating on the link between economic growth, energy consumption and air pollution. For this reason the cities are modeled as territorial units that have to promote growth minimizing simultaneously their environmental effect. Eco-efficiency of this panel of provincial capitals is empirically assessed. With the help of environmental control variables environmental best practices are evaluated. The necessary estimation is performed using a parametric input - distance function. The results provide evidence consistent with an Environmental Kuznets Curve indicating the existence of significant links between development, energy consumption and pollution at the provincial capital level.

Similarly, the fourth chapter by Kanayo Ogujiuba discusses two theoretical frameworks of the effect of economic development in the environment: the environmental Kuznets curve (EKC) and sustainable development framework. The LR relation between environmental factor crisis (like gas produced) and selected socioeconomic development indicators (like GDP, population below poverty level and infrastructure pressure) are considered. The study shows that unregulated gas exploration, gas utilization, oil spill and illegal oil bunkering in general have resulted to significant damages to the Niger – Delta environments.

The fifth chapter by Antonio Angelo Romano and Giuseppe Scandurra is policy oriented and it studies the effect of the adopted by Governments policies to stimulate investments in renewable energy sources (RES). It shows the unidirectional causality relationship between investments in RES and GDP (Gross Domestic Product), considering the effects on environmental problems like the emissions of CO₂ and the electricity consumption in the case of a panel data set consisting of 30 countries and for the time period 2000 – 2008. For this reason dynamic panel data econometric methods are used to analyze this issue

The sixth chapter by Cristina Mihaela Barbu, Mihail Cristian Negulescu, Pandelica Ionut, Irina Catalina Barbu and Elena Bica, discusses the concept of environmental management systems (EMS) that can be used to help firms to minimize their operations that negatively influence the environment damaging air, water, or land and to comply with the existing regulations, and other environmentally laws. Both EMAS and ISO 14000 are discussed and a theoretical comparison is presented. Interestingly and in the case of Europe, the paper shows the benefits from the introduction of EMS and how firms that introduced EMS have performed since 1995.

The following two chapters refer to policies related to sustainability. The seventh chapter by Georgia Mavrommati and Kostas Bithas argues that the Pareto optimality welfare criterion of efficiency may define the necessary operational conditions for sustainability. This intergenerational efficiency criterion requires the continuation of certain ecological necessities for future generations. Various ecological functions have to be maintained through time. This study proposes the safeguarding of at least the Biologically Crucial Levels (BCLs) of biological-ecological functions and procedures.

The eighth chapter Konstantinos Evangelinos and Antonis Skouloudis, discusses the notion of sustainability statement and reporting and the availability of environmental and social performance information to the public. In this way, organizational accountability has included aspects of non-financial nature and matters that can enhance the transparency of business activities and empower stakeholders’ decision-making. For this reason, an assessment method for sustainability reports based on the Global Reporting Initiative (GRI) guidelines is presented. This proposed benchmark method is used in the case of the airport and construction industries. The empirical findings show that the practices of sustainability reporting of the evaluated firms lack key issues, demanding more attention and improvement.

The last two chapters provide the basics of Optimal Control Theory and can be read separately or in combinations with other chapters providing the necessary background. Specifically, the ninth chapter by Iakovos Psarianos, starts by presenting the main principles of Optimal Control Theory as it is used in the theory of Economic Growth. This is followed by the presentation of the Neoclassical Model of Economic Growth and two applications where the optimal steady-state conditions are extracted. Specifically, the first uses optimal control methods in the neoclassical growth in order to maximize the representative household’s total inter-temporal welfare. Similarly the second, application, relying on the same problem, adds two additional variables affecting welfare in opposite directions. These are pollution and abatement expenditures. In both applications, the optimal steady-state conditions are derived. This allows for a preliminary comparison of the resulting balanced growth paths under the criterion of welfare maximization with and without environmental externalities.

Finally, the tenth chapter, by George Halkos and George Papageorgiou discuses briefly both the basics of optimal control theory and some keynotes for differential games. The latter may be considered as the game theoretic analogue of the optimal control. Principles and equations are presented like the Pontryagin’s Maximum Principle in open-loop, and the Hamilton – Jacobi - Bellman equation for the closed - loop informational structure for environmental models. Some environmental economic examples are presented as applications of the above theoretic considerations. The reading of this chapter may help to the understanding of the concepts used in the preceding analysis like the one in Chapter 1 and can be an inspiration for future research in terms of game theory and other advanced mathematical methods.

This book can be used by academics, researchers, and practitioners that are involved in the field of Natural Resource and Environmental Economics, and in issues like sustainability, economic growth and environmental quality, etc. Finally, I would like to thank all the participants who contribute with chapters in this book. Thanks are due to Laura Ştefănescu for her kind invitation to me to act as the editor of this book, as well as to ASERS Publishing for issuing this book.

George HALKOS, PhD Professor in Economics of Natural Resources

Laboratory of Operations Research, Department of Economics

University of Thessaly, Greece

http://www.halkos.gr/