Sustainable development and climate policy

Growth was long measured without asking what it used up. Rachel Carson’s Silent Spring (1962), Kenneth Boulding’s “spaceship Earth” (1966), the Club of Rome’s Limits to Growth (1972) and Nicholas Georgescu-Roegen’s The Entropy Law and the Economic Process (1971), with its argument that energy is a limiting factor, raised the question (UGC NET 2025). Herman Daly’s Steady-State Economics (1977) made ecological economics a school of its own, and the Brundtland Commission put the idea in the form that is used now: sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs (Our Common Future, 1987; Gro Harlem Brundtland chaired the Commission).

The decisions that the exams date are listed below. The first UN Conference on the Human Environment was held in Stockholm, Sweden, in 1972 (UGC NET 2024 gives Norway as a wrong option).

Two measures of pressure come up. The ecological footprint (Wackernagel and Rees, 1996) is the amount of pressure that people put on the natural resources available to them (UGC NET 2024), a measure of human demand on the ecosystem. And the I = PAT identity of Ehrlich and Holdren (1971) writes the environmental impact as population × affluence × technology, where P stands for population, not poverty (UGC NET 2024).

What does a generation have to leave to the next? Economists answer in terms of capital: manufactured capital, human capital and natural capital. Weak sustainability says that the total value of the capital stock must not fall, so natural capital may be run down if it is replaced by other capital of equal value; it rests on the assumption that the forms of capital are substitutes. Strong sustainability says that some natural capital, such as the ozone layer, a climate that supports life, or biodiversity, is critical and has no substitute, so it must be kept intact. Solow (1974) and Hartwick (1977) gave the best-known weak-sustainability result, the Hartwick rule: if all the rents from an exhaustible resource are invested in produced capital, consumption can be held constant forever.

Adjusted net saving (also called genuine saving; Pearce and Atkinson, 1993; Hamilton and Clemens, 1999) turns the weak criterion into a number: it is gross national saving less the depreciation of produced capital, less the depletion of natural resources (energy, minerals, forests) and the damage from pollution, plus spending on education as an investment in human capital:

With gross saving of 30, depreciation of 12, depletion of 4, pollution damage of 1.5 and education spending of 3, ANS = 30 − 12 − 4 − 1.5 + 3 = 15.5 per cent of income. A negative ANS signals that a country is running down its capital stock. The examiners use it this way (UGC NET 2023): ANS is a flow variable, being a saving rate; education spending is part of it and air-pollution damage and mineral depletion are subtracted, but the loss of biodiversity is not counted; and its shortcomings are that it allows substitution between forms of capital, that it is not a comprehensive indicator of per capita wealth and that it is influenced by the level of GDP. At best it serves as an indicator of unsustainability, and it should not replace GDP as a measure of progress.

The World Bank series is charted below. India’s adjusted net saving was 15.4 per cent of gross national income in 2021; Brazil’s was -0.25, that is, slightly negative, even though Brazil also saves. The reason is in the formula: saving that is offset by depreciation and depletion is not an addition to wealth.

Grossman and Krueger (1995) found that for several local pollutants, such as sulphur dioxide and smoke, pollution first rose and then fell with income per head, an inverted U like Kuznets’s curve for inequality, named after Simon Kuznets (UGC NET 2025). The reasons given are scale (more output, more pollution), composition (a shift from industry to services) and technique (richer people demand and can afford cleaner production). If it held generally, growth would be the cure for pollution, and the policy would be to grow first.

Test it on the gas that matters most. The chart plots carbon dioxide emissions per head against GDP per head for 186 economies, both on log scales, with the best-fitting quadratic. The curve is only slightly bent, with a fitted peak at about $182,000, which is above the income of every country in the data (the richest is at $139,593). The quadratic adds little to a straight line: R² is 0.74, against 0.70 for the line. The cross-section therefore gives no evidence of a turning point for carbon dioxide: richer countries emit more. Over time, rich countries have cut their emissions per head from a high level: the United States from 22.4 tonnes in 1970 to 13.6 in 2024, and Germany from 13.9 to 6.9, while India’s rose from 0.39 to 2.17 and China’s from 1.11 to 9.32. The fall in the rich countries came with policy, technology, the move of heavy industry abroad and a shift from coal, and not automatically with income. Stern (2004) reviews the criticisms: that the estimated turning points depend on the sample and the pollutant, that rich countries can import goods made with pollution elsewhere, and that the relationship may differ over time from the relationship across countries.

Three other “hypotheses” are named in GATE 2025: the pollution haven hypothesis (trade liberalisation can move production to countries where environmental regulation is weak or absent), the Porter hypothesis (stringent standards can push firms to innovate and become more efficient, not to stop innovating) and the race to the bottom (competition for investment can lead governments to relax regulation, not to tighten it). The question asks which statements are not correct: the version of Porter that says standards prevent innovation, and the version of the race that says regulation becomes more stringent.

An exhaustible resource such as oil or coal is an asset in the ground. A competitive owner will sell a unit today only if the sale is worth at least as much as keeping it, and the value of keeping it is what it will fetch later. Harold Hotelling (1931) drew the implication: in equilibrium the price net of the marginal cost of extraction, the owner’s scarcity rent (also called user cost), must rise at the rate of interest:

If it rose more slowly, owners would sell everything now and the price would fall; if faster, they would hold back and the price would drop later. With a demand curve that reaches zero at a choke price, the rule fixes the whole path. The price starts at a level that makes total extraction over the life of the resource equal to the stock, and rises until it reaches the choke price, at which point the resource is exhausted. In the calculator, demand is q = (100 − p), the extraction cost is 20, the stock is 1,000 and the interest rate is 5 per cent: the price starts at 40.3, of which 20.3 is scarcity rent, it rises each year (the net price by 5.1 per cent), and the stock lasts 27.4 years. At a rate of 10 per cent, the owners extract faster: the price starts lower, at 29.5, and the stock lasts only 21.3 years; at 2 per cent it starts at 55.9 and lasts 40.1 years.

Hotelling’s rule is a prediction of an efficient market, and real resource prices do not follow it closely, because of new discoveries, changes in extraction costs and market power. It remains the standard benchmark. It also underlies the Hartwick rule of the previous chapter: the scarcity rent that the rule tells owners to earn is the rent that, on the Hartwick rule, a country should invest in other capital.

To weigh a park against a road, the park’s benefits must be measured in money. The exams list the methods:

• Hedonic pricing: the price of a house includes the value of a park nearby or a scenic view, so regression of house prices on their characteristics, including environmental ones, gives the value of the change (UGC NET 2024; Rosen, 1974).
• Travel cost method: the cost people incur to visit a site (travel, time) reveals its recreational value; hedonic pricing is not the method used to value tourism sites (UGC NET 2024).
• Contingent valuation: people are asked directly for their willingness to pay (WTP) for an improvement or their willingness to accept (WTA) compensation for a loss (UGC NET 2024).
• Physical linkage (dose-response): estimates benefits from a technical relationship between an environmental resource and its user, for example the effect of air pollution on crop yield or health.
• Defensive expenditure: the consumer spends money to ameliorate the damaging effects of the bad (air filters, bottled water). The spending reflects willingness to pay to reduce the bad, and it is a lower bound on the willingness to pay, since the defence is not a perfect substitute for a clean environment and provides no services other than the desired quality (UGC NET 2023).

The methods feed into cost-benefit analysis: a project is worth doing if the present value of its benefits exceeds that of its costs, and the result depends on the discount rate, which is a matter of judgement and not observable directly. The social discount rate is the centre of the argument over the Stern Review (2006), which used a low rate to treat future generations nearly equally, and so recommended strong early action on climate; Nordhaus (2007) argued for a rate nearer to market rates. The review is paired with climate change in the exam (UGC NET 2024).

An example (GATE 2025). A solar plant costs 89,000 to install and lasts 5 years. It costs 5,000 a year to maintain and creates benefits, including lower emissions, of 25,000 a year. The social discount rate is 4 per cent, and the question supplies the rounded discount factors 0.96, 0.92, 0.89, 0.85 and 0.82, which sum to 4.44. The net benefit of 20,000 a year then has a present value of 20,000 × 4.44 = 88,800, and the net present value is 88,800 − 89,000 = −200. With exact factors (their sum is 4.4518) the value is +36: the project breaks even to within rounding, which is a reminder that the sign of a close case depends on the discount rate and the arithmetic. Follow the factors the question gives.

Greenhouse gases are the global externality of Lesson 15: non-rival and non-excludable, so every country gains from the others’ cuts and each has a reason to hold back. A carbon tax sets a price on each tonne emitted and leaves the quantity to adjust; cap-and-trade sets a total quantity of permits and leaves the price to adjust. Both put a price on carbon, and with no uncertainty they give the same result; Weitzman (1974) shows that with uncertainty about abatement costs, a tax is better when the marginal damage curve is flatter than the marginal abatement cost curve, and a cap when it is steeper, as with a threshold beyond which damage is catastrophic. The size of the tax should equal the social cost of carbon, the present value of the damage done by one more tonne, which depends again on the discount rate.

The agreements: the Kyoto Protocol (adopted 1997, in force 2005) set legally binding targets for developed countries and created emission trading; it is the agreement that the exam describes as aiming at a reduction in greenhouse gas emissions (UOH 2012). The Paris Agreement (adopted 2015, in force 2016) replaced binding targets with national pledges, called nationally determined contributions, reviewed regularly, with the aim of keeping warming well below 2°C and pursuing 1.5°C. The principle of common but differentiated responsibilities from Rio 1992 underlies the demand that countries which emitted most in the past bear more of the cost. The Green Climate Fund of the UNFCCC aims to balance its financing equally between adaptation and mitigation, a ratio of 50 to 50 (UGC NET 2024). At COP26 in Glasgow (2021) India announced a strategy of cutting the carbon intensity of its economy by 45 per cent by 2030 from 2005 levels, achieving net-zero emissions by 2070 and promoting a lifestyle for the environment (UGC NET 2023); the strategy as the question lists it did not include phasing out coal-based power by 2030 or capping total energy use.

In the data above, India’s emissions per head, 2.17 tonnes in 2024, are a fraction of the United States’ 13.6 and of China’s 9.3, though India’s total is large because of its population: the difference between per capita and total emissions is where much of the argument over responsibility lies.

Questions on sustainable development, adjusted net saving, environmental valuation, conventions and climate policy. Questions on externalities, Coase, Pigou and the commons are in Lesson 15. Dated figures, such as shares of renewable energy in a given month, are not worked here.