Environmental Big Push Basak BAYRAMOGLU∗&Jean-François JACQUES† January 23, 2009

Abstract Our objective is to analyze whether the post-Kyoto Protocol will cause a poverty trap for signatory developing economies. We augment the original Big Push model by introducing ambient taxes and environmental investments with fixed costs. We show that this model could lead to two equilibria. The "bad equilibrium" defines a situation in which the development is stopped because of stringent environmental standards. The "good" equilibrium, or what we call the “environmental Big Push”, defines a situation in which a given number of modern sectors have an incentive both to industrialize and invest in new environmental technology. Keywords: environment, pollution, standard, development, big push, poverty trap. JEL Codes: Q50, Q56, 014. ∗

INRA, UMR Economie Publique; AgroParisTech. Address: Avenue Lucien Brétignières, 78850 Thiverval Grignon, France. Tel: (0)1 30 81 45 35, E-mail: [email protected]. † EURiSCO, Université Paris-Dauphine, Place du Maréchal de Lattre de Tassigny, 75016 Paris. Tel: (0)1 44 05 44 60, E-mail: [email protected].

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1

Introduction

The participation of developing countries to future efforts for combatting the climate change problem represents the core of ongoing discussions about the design of the post-Kyoto Protocol. Developed countries have historical responsibilities for the emergence of the climate change problem. A fairness argument could impose no environmental constraints on developing economies because they are not at the origin of the climate change problem. The public good nature of this issue requires, however, that developing countries as future responsibles for this problem, make efforts to cut their greenhouse gas (denoted as GHG hereafter) emissions in the future. The Bali Action Plan, which resulted from the December 2008 United Nations climate change conference, also marks the first time that developing countries have accepted that they too will need to take action as part of the global effort. Their combined emissions are projected to exceed those of industrialized countries by around 2020 (Environment for Europeans, 2008). Hence the question that can be asked in this context is to know whether the post-Kyoto Protocol will cause a poverty trap for developing economies. The object of this paper is to explain, in a static model, the initial momentum for development in the presence of binding emission standards. In particular, we aim to investigate the link between the development process of a developing economy and its binding environmental standards. We posit that these standards are negotiated at the international level. We mainly ask if these exogenous environmental standards could stop the development process of this economy. We examine if situations where multiple sectors in a developing country modernize while at the same time they adopt new environmental technology could emerge. We call this situation an “environmental Big Push”. In this paper, we construct a static general equilibrium model to illustrate this situation. Our model is built on the analytical Big Push model of Murphy, Shleifer and Vishny (1989). We augment this model by introducing exogenous emis2

sion standards and environmental investments requiring the payment of fixed costs. These costs can include the acquisition of a new plant and new machines (setup costs), or the hiring and training new engineers. In our model, there are multiple sectors in the economy. The competitive fringe of firms, called traditional firms, operate with a constant returns to scale technology. Moreover, in each sector, there is a (potential) modern firm that can operate with an increasing returns to scale technology. Modern sectors refer to those which are in the industrialization process such as the manufacturing sector in developing countries. These sectors are more polluting than agrarian traditional sectors (Arrow et al. (1995)). The choices of production and abatement technology by firms are considered as endogenous. Sectors can select to adopt production and abatement technology having increasing returns to scale. This requires the payment of a fixed cost. The government of a developing country imposes an emission standard to polluting sectors in the form of a maximum allowable level of emissions for the whole economy. This environmental regulation is binding for firms in the sense that they should pay a fee when this environmental standard is collectively violated. The payment of the fee is based on excess emissions compared to the standard. This mechanism could also require the financing of abatement activities of the polluting sectors by the government. Under some conditions, we show that this model could lead to two equilibria: a “bad” equilibrium and a “good” equilibrium. The “bad equilibrium” defines a situation in which the development is stopped because of stringent environmental standards. The “good” equilibrium, or what we call the environmental Big Push, defines a situation in which a given number of modern sectors have an incentive both to industrialize and invest in new environmental technology. This indicates the need to coordinate the efforts of some polluting firms to undertake a costly investment in new abatement technology. The paper is organized as follows: the following section presents some of

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the contributions of the related literature. Section 3 details the model. The main theoretical result is presented in Section 4. Section 5 discusses some extensions of the model. Finally, Section 6 offers some concluding remarks.

2

Related Literature

Our model is inspired by the analytical Big Push model of Murphy, Shleifer and Vishny (1989). The concept of Big Push arises from studies in development economics and is related to the concept of the vicious circle of poverty.1 Basu (2003) highlights that poverty has a tendency to persist and that this underdevelopment maintains a state of equilibrium. Nurkse (1953, p.4) defines a vicious circle of poverty in the following way: “circular constellation of forces tending to act and react upon one another in such a way as to keep a poor country in a state of poverty”. A Big Push could exist when all producers take advantage of entering production by all entering production together, when it is not worthwhile for a single producer to increase production. This comes from the existence of increasing returns to scale in production technology (presence of fixed costs). This hypothesis is also common to studies on the Environmental Kuznets Curve (denoted as EKC hereafter). This concept hypothesizes that as economic growth proceeds, the environmental quality decreases, but after a certain level of development the environmental quality is assumed to increase. 2 The theoretical literature 1

See, among others, Rosenstein-Rodan (1943), Singer (1949), Nurkse (1953), Schitovsky (1954), and Flemming (1955). 2 This concept hypothesizes an inverted U form relationship between an indicator of environmental damage and per capita income. See, among others, Grossman and Krueger (1991) and Barbier (1997). However, Markandya (2001, p.206) underlines that “the evidence for such a relationship is mixed, with somes studies even showing a ‘U’ curve” (Stern, Common and Barbier (1996)). This relationship holds true for some localized pollutants, such as sulfur dioxide, nitrogen oxide, and not for global pollutants such as greenhouse gases. See de Bruyn and Heintz (1999) and, Constantini and Monni (2008) for a list of references on empirical studies testing the existence of an EKC.

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on the EKC is significant. 3 Andreoni and Levinson (2001) propose a simple microeconomic model to explain the emergence of an EKC. The assumption used to highlight this relationship is the existence of increasing returns to scale in abatement technology. The idea is the following: high-income individuals demand more consumption and less pollution. When there are scale economies in abatement, high-income individuals can more easily achieve these both objectives. The assumption of increasing returns to scale in production technology can also be found in the literature on the study of poverty trap for a developing country. These are dynamic models. Xepapadeas (1997) studies the possibility of a poverty trap when pollution problems are present. The model is that of an optimal growth model with a pollution abatement sector. It assumes the existence of scale economies in production and abatement which arise from knowledge spillovers. The stock of knowledge in abatement exhibits threshold characteristics. The author shows that developing countries can be trapped at low-steady-state income levels if abatement capital is insufficient. If the trap is avoided, nondeclining growth without excess pollution is possible. This depends on how long increasing returns in abatement can be sustained. The paper by Le Van et al. (2007) study the possibility of a poverty trap in the presence of a management problem of the stock of a nonrenewable resource. The production function is assumed to be convex for the low levels of capital (increasing returns to scale) and concave for high levels. The producer can either use the natural resource (assumed to be unnecessary for production) to produce a domestic consumption good or sell it abroad. 3

There are other explanations for the emergence of an EKC: the increasing export of pollution-intensive production processes from developed countries to less-developed countries (Suri and Chapman, 1998); the existence of advanced institutions for collective decision-making in developed countries which could implement environmental regulations (Jones and Manuelli (1995)). Some studies indicate the existence of an inverse-V-shaped relationship. The arguments are: the emergence of cleaner technologies after a threshold is attained for economic activity (Stokey (1998)); the need to environmental investment in case of a stock pollutant (John and Pecchenino (1994)).

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In the latter case, the revenue is used to buy an imported good, which is a perfect substitute of the domestic consumption good. This source of revenue could enable the country to accumulate a stock of capital sufficient to overcome the weakness of its initial stock. However, the same source of revenue also allows the country to consume without producing. This could remove the incentive of the producer to accumulate. This depends on the marginal productivity of the capital at the origin compared to the depreciation rate of the capital. Finally, our paper of adoption of technology is partially related to the literature on the link between appropriate environmental regulation and competitiveness. This literature is not specific to the economic problems of developing economies. Greaker (2006) shows that appropriate environmental regulation could improve competitiveness through more innovation. The mechanism of the paper which leads to the Porter’s hypothesis is as follows: a stringent environmental policy leads to a higher supply of new abatement equipment from the upstream sector. The decreased equilibrium price of these goods (despite the increased demand) increases the profits of polluting firms (downstream sector). Then the export output of polluting sectors may increase. In order to function, this mechanism requires the existence of positive spillovers among upstream firms, i.e., that the fixed cost of development of technology decreases with the number of firms that enter the upstream sector (“imitation” of innovation).

3

A Model of Environmental Big Push

We have a one-period economy. We take into account a developing country with (k) sectors. Each sector, either traditional or modern, produces a different product. Let consider the transition of economic development from clean agrarian economies to polluting industrial economies. The government of an econ6

omy imposes environmental regulations to its polluting firms in the form of −

a maximum allowable level of emissions, denoted as (E). We assume, for simplicity, that each modern sector causes a fixed amount of emissions (P ).4 If there is (n) sectors that have industrialized, two situations emerge: −

1) (n × P )≤ E

or

−

2) (n × P )> E In the first case, the total level of emissions of the economy is low enough to not exceed the environmental standard. Modern sectors are not constrained by the regulation; they pay nothing. In the second case, the environmental standard is violated because there is a higher number of modernized sectors (i.e., which pollute) than that in the first case. Let turn now to investigate the outcome of the model in the first case.

3.1

Equilibrium when the environmental constraint is not binding

In this section we follow Murphy-Shleifer-Vishny (1989).5 There is one price-taking consumer who supplies (L) units of labor, inelastically. It owns all the profits of the economy. The consumer’s utility function is: U = x1 x2 ....xk

(1)

where k goods are imperfect substitutes. The utility function does not depend on emissions because generally developing countries do not care much about the environment. Let (R) denote the aggregate income and (pi ) the price of good (i). The
maximization of (1) subject to the budget constraint (R = ki=1 pi xi ) gives 4 5

We relax this assumption and discuss its implications in Section 5. The presentation of this model is inspired by Basu (2003, chapter 2).

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the demand function for good (i): xi =

R kpi

(2)

We assume that the wage is numeraire. The aggregate income is as follows: −

R =π+L

(3)

−

where (π) represents the aggregate profit earned in the economy. Let us now describe the market structure in each sector. The competitive fringe of firms, called traditional firms, can convert 1 unit of labor into 1 unit of output (so the marginal cost of production is 1). Hence competitive firms operate with constant returns to scale technology. We assume that these firms can enter into and exit from the industry costlessly. The zero profit condition for competitive firms implies that they have a perfectly elastic supply at price 1 (pi = 1). Moreover, in each sector, there is potentially a modern firm (a monopolist) that can convert 1 unit of labor into α > 1 units of output (so the marginal cost of production is ( α1 < 1), if it incurs a fixed cost F > 0 (for example, the cost of a patent), which corresponds to F units of labor. Hence the monopolist has access to an increasing returns to scale technology. The industrialization of a sector is realized if a monopolist enters production in that sector. The price of the monopolist is 1 in order to capture the demand of the market. The latter is then equal to (xi = Rk ). The monopolist’s profit is given by the following expression: (1− α1 )(R/k)−F , which can be rewritten as: α−1R aR −F ≡ −F (4) α k k with 1 > a > 0, which represents the mark-up of the monopolist. Let R(n) denote the aggregate income when (n) sectors industrialize ; it π=

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is written in the following way: R(n) = n[ aR(n) − F ] + L. The resolution of k this equation gives: R(n) =

k(L − nF ) k − na

(5)

When (n) sectors have already modernized, the monopolist’s profit in each of these sectors is given by: π(n) =

aL − kF k − na

(6)

The denominator of (6) is always positive. The sign of π(n) is then determined by that of (aL − kF ), which is independent of (n), the number of modernized sectors. Let us suppose that (aL − kF ) is positive so that it is of its interest for a firm to industrialize. This assumption means that the overall benefit in terms of production cost of the industrialization, aL, is higher than its total costs, kF. Let (n) sectors be modernized, and look at the incentive of a monopolist to enter production. Its profit will be: aL−kF , which is positive because (aL − kF ) is positive by π(n + 1) = k−(n+1)a assumption. Consequently, the only equilibrium in this case is that all sectors modernize. On the contrary, if (aL − kF ) is negative, the unique equilibrium is that no sectors modernize. Except the knife-edge case, i.e., (aL − kF ) = 0, there is a uniqueness of equilibria. In this paper, we ask whether binding emission standards could help an economy to quit the poverty trap, or more precisely, to avoid the “bad” equilibrium in which no sectors industrialize.

3.2

Equilibrium when the environmental constraint is binding −

As we have already mentioned, if (n × P )> E, the environmental standard is violated because there is a significantly high number of sectors which had

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modernized, but which did not invest in new environmental technology. The excess amount of emissions compared to the environmental standard is equal −

to: (n × P − E). The environmental regulation requires each monopolist to pay: −

n×P −E v[ ] n where (v) is a positive parameter. In one sense, it represents the ambient tax rate. Modern sectors have the possibility to invest in new (modern) environmental technology. We assume6 for simplicity, that this technology is so sophisticated that the marginal abatement cost is null, but the investment requires the payment of a fixed cost(S).7 Thus, firms do not emit pollution when they invest in this technology. A modern sector will invest in new abatement technology if and only if the fixed of investment is lower than the payment of tax on emissions: −

n×P −E S < v[ ] n The respective profits of (n) modern sectors, (m) of which investing in the new environmental technology can now be written as such:

−

π mt π mm

E 1 = xi (1 − ) − F − v[P − ] α n−m 1 = xi (1 − ) − F − S α

(7)

where the index ‘mt’ denotes the monopolist’s profit with the traditional 6

We relax this assumption and discuss its implications in Section 5. This fixed cost of investment does not depend on the number of sectors (m) that had already invested in this technology, contrary to the assumption of the Greaker (2006) model of development of technology. Thus, we exclude learning or imitation possibilities across sectors. 7

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abatement technology, and the index ‘mm’ denotes the monopolist’s profit with the modern abatement technology. Remember that the profit of the competitive fringe of the market is zero.

4

Main Result and Numerical Illustration

We refer to Figure 1 to illustrate the idea of an environmental Big Push. This figure represents the profit of a modern sector as a function of the number of sectors that industrialized (n).

4.1

The existence of two equilibria

• REGION 1: Modernization — Respect of the Environmental Standard We assume that, in Region 1, the environmental standard is not violated, −

−

i.e., (n × P )< E, with n < n. In fact, Region 1 corresponds to the case where each sector has an incentive to modernize if (aL − kF ) > 0. Full F L > industrialization requires the following condition: Condition 1: k a

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Profit of a modern sector as a function of the number of modern sectors

• REGION 2: Modernization — Non-Respect of the Environmental Standard — Non-investment in the New Abatement Technology We assume that, in Region 2, the environmental standard is not met, −

i.e., (n × P )> E, because of the absence of investment in new environmental − technology by n > n modern sectors (m = 0). As we know from the preceding section, the profit of a modern sector is written: −

1 E (8) π = xi (1 − ) − F − v[P − ] α n The market demand for each sector is equal to xi = R/k. The aggregate income of the economy is given by: mt

12

−

vE aR R = n[ − F − vP + ]+L (9) k n because the profit of the competitive fringe of the market is zero and the wage is equal to 1. This equation gives the expression of the aggregate income R: −

[L − nF − nvP + vE]k R= (10) k − na If we substitute this expression into the profit of each monopolist, we obtain: −

La − k[F + v(P − En )] mt π = (11) k − na This profit is null for the specific number, n∗ , of sectors which modernize: −

E n∗ = 1 aL P − v[ k − F]

(12)

It is clear that this specific number of modern sectors, for which the profit of the modern sector which did not invest in environmental technology nullifies, diminishes with the stringency of the environmental standard (low −

E), with unit emissions P (high P ), the level of the fixed cost of investment in modern production F (high F ) as well as with the marginal abatement cost of the old abatement technology v (high v). On the contrary, n∗ increases with the extent of scale economies in modern production (high a) and the income of wage (high L) which stipulates demand for each product in the economy. This specific number of sectors is positive, n∗ > 0, if the following condition is satisfied:

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aL − F k (13) k This condition requires that the amount of the fee paid by the first modern sector (n = 1) in the presence of the most stringent national environment Condition 2: vP >

−

standard (no emissions at all, E = 0), - so when this sector violates the standard -, must be higher than the net benefit of modernization per sector k ( aL−F ). In this case, the profit of this modern firm nullifies. k Another condition is that none of the first (n∗ ) modern sectors find it worthwhile to invest in new abatement technology. This condition reduces −

to the following: v[ n×Pn−E ] < S. From the condition π mt = 0, we have the −

following equality: aL − F = v[P − nE∗ ]. This implies k third condition can be written as follows:

aL k

− F < S. So the

L F +S < (14) k a This condition can be read as follows: the net benefit of modernization k per sector ( aL−F ) is lower than the fixed cost of investment in abatement k Condition 3:

(S).

• REGION 3: Modernization —Respect of the Environmental Standard —Investment in the New Abatement Technology We assume that, in Region 3, the environmental standard is met thanks to the investment in new abatement technology by (m > 0) modern sectors. So we have: −

Condition A4: ((n − m) × P ) < E, with n > n∗ The profit of a modern sector that did not invest in new abatement technology, when m others did, is written as: 14

aR −F k The aggregate income of the economy is given by: π mt =

(15)

aR aR − F ] + m[ − F − S] + L (16) k k where the first term corresponds to the profit of (n − m) modern sectors with the traditional abatement technology. The second term represents the profit of (m) modern sectors that invested in new abatement technology. This equation gives us the expression of the aggregate income R: R = (n − m)[

[L − nF − mS]k (17) k − na If we substitute this expression into the expression of the profit of each monopolist (that did not adopt new abatement technology), we obtain: R=

La − mSa − F k (18) k − na The condition that ensures the positivity of this expression defines the following condition: πmt =

F mS L > + (19) k a k This condition says that the net benefit of modernization per mark-up Condition 5:

( aL−kF ) is higher than the total fixed cost of investment in new abatement a technology (mS). Last we need the positivity of the aggregate income (R) of the whole economy.8 This requirement implies the last condition: Condition 6:

L nF mS > + k k k

8

(20)

A stricter condition would be the positivity of the profit of each (m) modern sector that invested in the new abatement technology.

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The condition says that the total wage earnings (L) must exceed the total of fixed costs (nF + mS) paid for investments in modern production and abatement. The positivity of the aggregate income implies the possibility that the aggregate profit of modern sectors that invested in new abatement technology could be negative. This transfer of revenue among modern sectors is similar to the payment of subsidies by a government for environmentallyfriendly actions of the private sector. We can now write the main proposition of the paper. Proposition If Conditions 1, 2, 3, 4, 5 and 6 are satisfied, two equilibria emerge: 1) “bad equilibrium” characterized by a low level of development ( n∗ ) without adoption of new abatement technology, and 2) “good equilibrium” characterized by a higher level of development ( n∗∗ ) with the adoption of new abatement technology [the environmental Big Push]. The “bad” equilibrium defines the equilibrium with a low level of development without adoption of new abatement technology, because none of the modern sectors invest in new technology. Therefore, the environmental standard is exceeded. This defines a situation in which the development is stopped because of stringent environmental standards. The “good” equilibrium, or what we call the environmental Big Push, could be explained as follows. If the number of modern sectors increases, the cost of modernization will increase because of the environmental fees that modern sectors are held to pay in case this standard is collectively violated. This could prevent some sectors from industrializing. However, if some of these modern sectors invest in new abatement technology, the environmental constraint for all modern sectors could disappear, or at least diminish, because in this case the environmental standard will be respected. This could induce some more traditional sectors to become modern. This, 16

however, could require that subsidies are offered to modern sectors which are willing to invest.

5

Discussion

(1) Positive emission by the modern sector with the new abatement technology So far, we have assumed that the modern sector with new abatement technology does not emit pollution, because the marginal abatement cost was assumed to be null in this case. We now assume that each modern sector which invests in new technology emits a fixed amount of emissions P mm , which is lower than the amount emitted by the modern sector with the old abatement technology, i.e., P mm < P . Let now suppose that the environmental standard is violated in spite of the investment of (m) of the −

(n) modern sectors, with n > n∗ : [(n − m)P + mP mm ] > E. This condition defines Condition 4’. This trait changes the description of the conditions of Region 3 on Figure 1. The marginal abatement cost of the modern sector which invests in new abatement technology is now written as ( βv ), with β > 1. The respective profits of (n) modern sectors, (m) of which investing in new environmental technology can be written as follows:

−

π mt

R (n − m)P + mP mm − E = a−F −v k n −

π

mm

v (n − m)P + mP mm − E R = a−F − −S k β n

This scheme of environmental payments implies that the modern sector with the modern abatement technology pays less variable abatement costs

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thanks to investment, which in turn requires the payment of a fixed cost of investment S. We proceed in the same way as in the previous section to define the conditions for the existence of an environmental Big Push. With this extension of the model, the description of the conditions for Region 2 on Figure 1 does − not change. Thus, the threshold numbers of sectors n and n∗ , and Conditions 1, 2 and 3 maintain. As we have already mentioned, this extension of the model only changes the description of the conditions of Region 3. New Conditions 5’ and 6’ are defined in Appendix I. Remark 1 The aggregate income of the economy in Region 3 is reduced compared to the one in the base model. This finding arises from the payment of variable abatement costs by the modern sectors with the new abatement technology in this case, whereas they were paying nothing in the base model. (2) Endogenous Pollution - Positive emission by the modern sector with the new abatement technology So far, we have assumed that each modern sector emits a fixed amount of emissions P. We now posit that emissions arise from the production activity of this sector. Since supply equals demand in the model, the pollution function takes the following form: P = ex where e represents a positive emission parameter. When (n) sectors industrialize, this function writes: R(n) k because the market demand for each sector is equal to xi = R/k. P (n) = e

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The profit of each (n) modern sector with the old abatement technology is written as follows: −

R R E π = a − F − v[e − ] k k n This extension of the model changes the definition of the conditions for Region 2 on Figure 1. Thus, Conditions 1, 2 and 3 are replaced with Conditions 1, 2end , 2’end and 3end which are described in Appendix II. We also assume that each modern sector which invests in new technology has a lower emission parameter emm than that of the modern sector with mt

the old abatement technology, i.e., emm < e. This is allowed by the lower marginal abatement cost of the new environmental technology, ( βv ) with β > 1. The profit of each (m) modern sector which adopted the new environmental technology can be written as follows: −

π

mm

R v R E = a − F − [emm − ] − S k β k n

This extension changes the definition of the conditions for Region 3. We assume that the environmental standard is violated in spite of the investment     − of (m) of the (n) modern sectors, with n > n∗ : (n−m) e Rk +m emm Rk > E. This condition defines Condition 4end . Conditions 5 and 6 are replaced with Conditions 5end and 6end which are described in Appendix II. −

The threshold number of modern sectors n is defined in the following way: −

−

−

n × P (n) = E ⇔ n × e

− R =E k

−

with R =

[L−nF +v E]k . k−n(a−ve)

This gives us: − −

n=

E(k − na + nve) −

e(L − nF + v E) 19

−

Remark 2

The threshold number of sectors n is lower than the −

one with the base model, when P and F are low, and L, E, a are high. −

Proof. We call the threshold number of sectors n in this second extension −ext2 −ext2 of the model as n . This variable is defined in the following way: n = −

−

−

−

1 k E( P (n) ) = Ee R(n) . Remember that n = E . Thus, the difference between the P two threshold numbers is written as follows:   − −

−ext2

n− n

−

=E

1 P

−

k eR(n)

with R(n) =

[L−nF +vE]k . k−n(a−ve)

This remark highlights that modern sectors violate the environmental standard faster in the case of endogenous pollution than in the fixed case, −

when P, F are low and L, E, a are high. We know that the monopolist produces more than the traditional sector thanks to scale economies. Then, it pollutes more in the case of endogenous pollution than in the fixed case, when the extent of scale economies a is high. On the other hand, when the total income of wage L increases and, the fixed cost investment in modern production F and the stringency of the environmental standard decrease, the aggregate income and then the pollution level increase, which in turn accelerates the violation of the environmental standard. This reduces the −ext2 value of n in the case of endogenous pollution.

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Conclusion

The objective of this paper was to illustrate the possibility of an environmental Big Push. This is achieved in a static general equilibrium model with multiple sectors inspired from the analytical Big Push model of Murphy, Shleifer and Vishny (1989). The latter model is augmented with the introduction of environmental investments requiring the payment of fixed costs. This model could then lead to the multiplicity of equilibria: a bad equilibrium in which the development is stopped because of stringent environmental standards; or a “good” equilibrium, or what we call the environmental Big 20

Push. In the latter case, binding environmental standards could induce some sectors to industrialize and invest in new environmental technology. This mechanism could further require that subsidies are offered to manufacturing sectors which are willing to invest in new environmental technology. Such an incentive scheme may allow some traditional sectors to become modern (with an increasing returns to scale production technology, but with higher emissions), and at the same time to invest in new environmental technology (with no emissions). The existence of an environmental Big Push stems from the spillovers across sectors channelled through the environmental standard and the implied level of the environmental fee in case the standard is collectively violated. This analysis is limited in terms of the type of environmental regulation. We have taken into account the case in which governments impose, to modern sectors, an ambient tax proportional to excess emissions if they do not collectively meet the environmental standard. A further extension of the paper will investigate how the decisions of production and abatement would change if governments apply a unit tax rate to actual emissions, such as the Pigouvian tax. In this case, modern sectors would be obliged to pay both the abatement costs and the costs of emissions (payment of tax) when the environmental standard is collectively violated.

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[12] Markandya, A. (2001): “Poverty, environment and development”, in Frontiers of Environmental Economics, Folmer H., Gabel H.L., Gerking, S., Rose. A., Edward Elgar, Cheltenham, UK. [13] Murphy, K.M., Shleifer, A., Vishny, R. (1989): “Industrialization and the Big Push”, The Quarterly Journal of Economics, vol. 97, 10031026. [14] Nurkse, R. (1953): Problems of Capital Formation in Underdeveloped Countries, Oxford University Press, New York. [15] Rosenstein-Rodan, P.N. (1943): “Problems of industrialization in eastern and south-eastern Europe”, Economic Journal, vol. 53, 202-211. [16] Schitovsky, T. (1954): “Two concepts of external economies”, Journal of Political Economy, vol. 62, 143-151. [17] Singer, H. (1949): “Economic progress in underdeveloped countries”, Social Research, vol. 16, 1-11. [18] Stern, D., Common, M., Barbier, E. (1996): “Economic growth and environmental degradation: the environmental Kuznets curve and sustainable development”, Word Development, vol. 24, 1151-1160. [19] Stokey, N.L. (1998): “Are there limits to growth?”, International Economic Review, vol. 39 (1), 1-31. [20] Suri, V., Chapman, D. (1995): “Economic growth, trade and energy: implications for the Environmental Kuznets Curve”, Ecological Economics, vol. 25, 195-208. [21] Le Van, C., Schubert, K., Nguyen, T.A. (2007): “With exhaustible resources can a developing country escape from the poverty trap?”, Document de travail CES, 2007.75.

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APPENDIX I- REGION 3: Modernization —Investment in New Abatement Technology —Violation of the Environmental Standard The aggregate income of the economy is given by:

−

R (n − m)P + mP mm − E R = (n − m)[ a − F − v ] k n −

R v (n − m)P + mP mm − E − S] + L +m[ a − F − k β n This equation gives us the expression of the aggregate income R:

R=

  − β(n−m)+m mm )(v E − (n − m)vP − mvP k L − mS − nF + ( βn k − na

If we substitute this expression into the expression of the profit of each monopolist that did not adopt the new abatement technology, we obtain:

π mt =

  − β(n−m)+m a L − mS − nF + ( )(vE − (n − m)vP − mvP mm βn k − na −

v(n − m)P vmP mm v E −F − − + n n n

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The condition that ensures that this expression is positive, π mt > 0, defines Assumption A5’. The condition that ensures the positivity of the aggregate income of the whole economy, R > 0 defines Condition 6’.

II- REGION 2 and 3: Modernization — Investment in New Abatement Technology — Violation of the Environmental Standard — Endogenous Pollution In Region 2, the aggregate income of the economy is given by: −

−

R R E [L − nF + v E]k R = n[ a − F − ve +v ] + L ⇔ R = k k n k − n(a − ve) If we substitute this expression into the profit of each monopolist, we obtain: −

−

n(a − ve)(L − nF + v E) − (k − n(a − ve))(nF − v E) π = n(k − n(a − ve)) mt

This profit is null for the specific number, n∗ , of sectors which modernize: −

−kv E n= aL − veL − kF This specific number of sectors is positive, n∗ > 0, if the following condition L F < , with (a − ve) > 0 (Condition 2’end ). is satisfied: Condition 2end : k (a − ve) Another condition is that none of the first (n∗ ) modern sectors find it worth∗

while to invest in new abatement technology. This condition reduces to the following: −

−

−

R E v R E R E 1 v[e − ] < [emm − ] + S ⇔ v[e − ](1− ) < S k n β k n k n β So the third assumption can be written in the following way:

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



−

ne(L − nF ) − E(k − na)  S Condition 3end :  < (k − n(a − ve))n vb where b = (1 − β1 ). In Region 3, the aggregate income of the economy is given by:

−

veR vE R R = (n − m)[ a − F − + ] k k n −

R vemm R vE +m[ a − F − + − S] + L k βk βn This equation gives us the expression of the aggregate income R:

R=



−

−

−



Lβn + mv E − mSβn − βmv E + βnv E − βF n2 k n [βk − βna + βnve − βmve + mvemm ]

The positivity of this expression defines Condition 6end . If we substitute the expression of the aggregate income into the expression of the profit of each monopolist that did not adopt the new abatement technology, we obtain π mt . The positivity of the latter defines Condition 5end .

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