By Rosalina Palanca-Tan, Allen Timothy Dy and Angela Tan
The Environmental Kuznets Curve (EKC) suggests that environmental degradation, such as pollution, increases in the early stages of development, reaches a maximum at the middle-
income level, and then decreases with further income expansion. As a country starts to develop, pollution worsens due to the increase in the production of commodities.
The decline in environmental damage as the country reaches the middle- income level results from the shift in economic structure from the polluting manufacturing industries to the relatively clean services and information sectors, technological innovations in pollution and environmental-damage control, and greater availability of public funds for environmental investments. Further, with greater wealth, there is greater demand for environmental quality. An effect on the scale of activity may also arise. As income rises, population-growth rates drop and approach replacement levels. The EKC hypothesis trivializes the issue of environmental degradation, as it is seen to be temporary with development eventually leading to a better environment. Hence, an empirical test of the existence or nonexistence of the EKC will have important implications on development policy orientation. A strong empirical evidence for the EKC justifies a lenient environmental policy scenario, while the absence of such evidence supports the pursuit of an economic growth trajectory that is stringently constrained by environmental considerations.
We looked at the relationship between carbon-dioxide (CO2) emissions and economic growth in the Philippines during the period 1971 to 2010. Our country is currently one of the fast growing economies in Asia, and the environmental consequences, if any, of this long-desired growth must be investigated and accordingly addressed. CO2 is said to account for about 64 percent of the greenhouse gasses that cause global warming. The need to be watchful of increased CO2 emissions that may accompany income growth is dictated by both internal and external factors. Due to its geographical location, topography and current socioeconomic structure, the Philippines is considered highly vulnerable to climate- change impact. Its more than 7,000 small islands and long coastline expose much of its land and people to the dangers of stronger tropical storms and flooding. Increased occurrence of extreme weather disturbances may significantly lower productivity in agriculture and fisheries, sectors on which majority of the Filipinos depend for livelihood. The incidence of below-subsistence living may increase and gaps among socio-economic classes may widen as those in the lower strata are more susceptible to the damages that climate change can bring and are less able to cope with it than those in the upper strata. With added pressure to adhere to global environmental initiatives on carbon-emission reductions (such as that of the Kyoto Protocol), Philippine policy- makers are faced with difficult decisions regarding long-run economic growth and environment paths that the country must thread. In order to make sound policy choices, there is a need for empirical evidence on the relationship of key economic variables with CO2 emissions.
Our study yields no evidence of an EKC phenomenon in the case of CO2 in the Philippines. Instead, we found that CO2 emissions would tend to increase continuously with economic growth, suggesting that growth policies must be subject to reasonably stringent environmental constraints related to CO2 emissions. The other macroeconomic variables that turn out to be significantly associated with CO2 emissions are energy use, urbanization and foreign direct investments (FDI).
CO2 emission is inelastic with respect to energy use in the short-run, but its response becomes elastic in the long-run. This finding underscores the need for policies that promote cleaner sources of energy and more efficient use of energy so as to dampen the effect of energy use, an indispensable production input for the currently fast growing Philippine economy, on the environment.
Urbanization has a highly elastic negative impact on CO2 emissions, implying that urbanization is associated with lower CO2 emissions. This may be explained by the large services sector and the relatively small manufacturing sector in the country, an employment composition that is more commonly found in high-income, rather than low- and middle-income economies. In 2009, more than 50 percent of the working population in the Philippines was employed in the services sector, and only less than 9 percent was in the manufacturing sector. Comparable lower-middle income countries in Asia, such as Thailand and Indonesia show a more robust manufacturing sector, accounting for 14 percent and 12 percent, respectively, of the working population, and smaller services sector (employment ratios of 39 percent and 41 percent, respectively).
The positive elasticity of CO2 emissions with respect to FDI suggests that FDI increases CO2 emissions. This may be explained by the sectoral distribution of FDI in the country. The manufacturing sector accounts for the greater part of FDI in the Philippines. From 1996 to 2009, the share of the manufacturing sector in total approved foreign investments averaged 53 percent. Though an association between CO2 emissions and FDI is statistically established, the magnitude of the impact is small (very low elasticity), which may imply that the manufacturing FDIs in the Philippines are not using very dirty technologies.
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Rosalina Tan is professor of Economics; Allen Timothy Dy and Angela Tan are with the Department of Economics, Ateneo de Manila University.