In Focus
October 2011

Rising Wealth in Asia Boosts Demand for Stricter Environmental Regulations

Increasing wealth in Asia is driving demand for more than just cars and consumer goods. "As incomes grow, there is increased demand for environmental regulations which will change techniques of production, making them cleaner. Also, as countries become richer they can afford more advanced technology with which to reduce environmental damage," said Matthew Cole, a professor of economics at the University of Birmingham in the U.K.

Cole conducts research on the impact of trade, economic growth and investment flows on the environment and the role played by differences in environmental regulations. In particular, he looks at these factors in the context of developing countries.

An upside down U
There's a theory behind this Asia-wide trend. Named the environmental Kuznets curve, or EKC, it seeks to explain the trajectory seen in the developed world previously and in developing nations now.

In general, said Cole, economic growth impacts the environment through the scale, composition and technique effects. The scale effect says that, all else being equal, more economic activity leads to more pollution. The composition effect says that as countries grow richer they move from pollution intensive industries to cleaner manufacturing and services. Finally, the technique effect is the change in production brought about by technology and by consumer demand.

During initial development, the scale effect dominates. Eventually, increasing wealth makes the other two strong enough to overcome it. As a result, the shape of emissions follows the path of an upside down U.

That's the theory, at least. While not everyone accepts it, it does appear to be correct, particularly for local air pollutants. For example, sulfur and nitrogen oxides, the result of cars and trucks burning fuel, follow this relationship with income.

The same is true for other airborne emissions. A study by Abdul Jalil at Wuhan University in Wuhan, China, and Syed Mahmud at Bilkent University in Ankara, Turkey, looked at Chinese CO2 emissions from 1975-2005. In a 2010 Energy Economics paper, the researchers found that growing wealth did in fact lead to an inverted U.

"The developing country gets cleaner technology with growing income and finances," said Jalil, who is associated with the Quaid-i-Azam University in Islamabad, Pakistan.

Muhammad Nasir and Faiz Ur Rehman came out with the same results for Pakistan. In the long run, CO2 emissions declined with increasing wealth, according to a 2011 Energy Policy paper. Nasir, a staff economist at the Pakistan Institute of Development Economics in Islamabad, noted that wealth by itself isn't enough.

"It's not only the income, or gross domestic product, that matters in that maturity but also the education level and health status of the masses," he said.

Tunneling Through
On the whole, Asian countries and regions are following paths similar to that taken by other areas. For fuels, this means that what is coming will be somewhat similar to, but not exactly the same as, what is found elsewhere.

Beijing, for example, plans to implement National Standard V, equivalent to Euro 5, in 2012. For fuels, this means that diesel fuel will contain a maximum of 10 parts per million (ppm), while NOx emissions in gasoline will need to be reduced by 25 percent.

This is happening within a year or two of the same standards being imposed in Europe, even though the 2011 per capita GDP in China is less than US$3500, according to the Manila-based Asian Development Bank. In Germany and France, the corresponding 2009 figures from the International Monetary Fund were almost US$41,000 and US$43,000, respectively. The Chinese appear to be taking advantage of expertise and technologies to burrow through the inverted U, thereby avoiding the worst pollution.

This tunneling may be helped by the advent of such programs as a new four-year honors course starting this August at the National University of Singapore. Students will earn undergraduate degrees in environmental studies, with experience in studying real-world situations such as the causes of the haze that occasionally envelops Singapore. There is also the two-year old Environmental Health and Safety Academy run by Sun Yat-sen (Zhongshan) University in Guangzhou, China. It seeks to promote environmental stewardship.

Regulations vs. Reality
But, taking a shortcut is not easy and is sometimes made more difficult by governmental policies, fuel subsidies in particular. In India, kerosene, which is primarily used for cooking, is much cheaper than either diesel fuel or gasoline, with a predictable effect on fuels and emissions.

"People tend to blend kerosene into gasoline or diesel, and the unwary user is left with the problem," said K.K. Gandhi, executive director of the Society of Indian Automobile Manufacturers (SIAM).

South Korea is another case in point. The country announced a greenhouse gas emission reduction plan in 2009 that places it on par with the goals of Western nations. At that time, South Korea's per capita GDP stood at about US$21,500, half that of France and Germany. However, the initial plan to start carbon trading in 2013 was recently put off until 2015 because of strong opposition from industry.

Another barrier to taking a shortcut is that government edicts may exist on the books but not in practice. Exemptions may be granted or sanctions skipped, either for whole industries or individual vehicles.

As the University of Birmingham's Cole said, "Although on paper China may have more stringent environmental regulations than Europe did at a similar level of income, a big problem in China and many other developing nations is that of enforcement. There is a big difference between nominal and effective regulations."

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