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O O O o 4 4 O o O O 4 4 O @. 8 , 3 O 0 P O f 3 f O f 4 O l \ 0 " O \ \ \ \ \ \ P o o o o H H H , H H H , H H H 4 4 4 4 4 4 Issue 6: On environment, natural resources, and economic developmentI am pleased to see our panel session proceed very well. Now we move to the issue No. 6, environment, natural resources, and economic development. Important though the issue is, I was unable to find a suitable panelist for this topic. We human beings have achieved tremendous economic progresses in the last 250 years. Several reliable estimates suggest that the average income per person for the whole world had stayed at around $500 up until 1750s. Then suddenly the world economy began to take off and by the year 2000, the average income has risen to about $7,500. Thanks to this remarkable economic growth billions of people in the developed and developing world can now enjoy rather decent life styles. The progresses in the last 250 years have, however, simply bypassed those billions of people in the under developed countries: They remain as poor as there were.In the process of achieving the remarkable economic growth, human beings have, however, incurred substantial costs. Wherever progresses have made, natural environments in the surrounding areas have rapidly degraded. Air pollution, water pollution, noise pollution, soil contamination, destruction of mountains, rivers, lakes, and oceans, and so on are just a few examples of the costs incurred. Increasingly more and more people are demanding to do something about environment: They want to live in cleaner environment, even if that can be done only with substantial sacrifices in living standards. More importantly, our uses of fossil fuels have been increasing very rapidly. This heavy reliance on fossil fuels has been mostly thanks to their relatively low real prices. The real prices of crude oils have, for example, steadily decreased for most of the periods. The heavy reliance now begins to pose two serious problems. One is the worry that these valuable resources are over exploited and as a result they will soon run out. If that is the case, maintaining fossil fuels dependent life styles that we are very much accustomed to would be almost impossible. It is urgent, therefore, for us to find alternatives to fossil fuels. Another is the green house gases that we have been emitting ever since the economic growth took off. In the past the emission did not pose serious challenges. However, in recent years as these gases are being trapped in the atmosphere and thereby form a tight barrier preventing the heat from the earths surfaces from escaping. Many scientists believe the green house gases trapped in the atmosphere are the culprits for the global warming. Scientifically these claims are not fully proven to be true. However, as the majority of the opinion leaders in the world hold the beliefs that green house gases are causing global warming and global warming is serious threat to human beings, it is by now almost unavoidable to do something about it.The discussions so far are background to the green-growth initiatives rapidly spreading all over the world. Just think about what and how much Japan and EU countries have been doing to have cleaner environments and to reduce green house gas emissions. It is a harbinger to what would come next that President Obama is putting extremely heavy emphases on transforming the American economy from brown to green. Even China, who is being scolded for some time now as being the worlds thirstiest fossil fuel guzzlers and hence the worlds worst green house gas emitters, has made the greening of Chinese economy a priority. It is also along the same logic that S. Korea is putting the green growth strategy as the No. 1 national priority.The discussions so far suggest the following list of questions that we might discuss. What is the green growth? What could be rationale to pursue it? How to achieve green and growth? Are they mutually offsetting, or are they mutually reinforcing? Would it not be another smokescreen for trade barriers? How about those poor people who cannot afford green?In order to facilitate discussions, let me introduce a simple model of green growth. For this consider the followings: QUOTE (1) QUOTE (2) QUOTE (3)Here y = per capita income, x = pollutants emitted per person, A = productivity level of the economy, B = knowhow concerning pollution controls, and k and z are unspecified other factors. Equation (1) indicates how agents value income and pollution. As these latter are determined as functions of A and B, equation (1) is expressed as an indirect utility function. The first term in (1) is the usual utility function. For simplicity U[ ] is modeled to depend on y/x. The second part, V(A,B) is rather unusual. The choice of A or B entails costs. (It would be costly to improve productivity and/or emission control knowhow.) And V(A,B) stands for utility costs of choosing a particular value of A and B. Normally we should put the costs into production functions (2) or (3). Equation (2) is the economys per capita output production function. The function f( ) is assumed to be strictly increasing and strictly concave in x. Productivity A is a shirt term. Equation (3) is the economys pollution production function, where g( ) is strictly increasing and strictly convex function of y. (1/B) is its shift term. The economy would optimally choose A and B that would maximize (1) among the pairs that simultaneously satisfy (2) and (3). The actual choice of A and B would be determined from an interaction among three forces. One is how the agents value the choice of A or B, i.e., the shape of U[ ] in (1). The other is how costly it is to alter A or B, i.e., the shape of V( ) in (1). The third is how A or B contributes to the production of y and x as specified in (2) and (3). A society whose citizens strongly value y and intensely dislike x would choose a rather large A and B so that the resulting y is large and x is small. A society where it is costly to change A or B would end up with small A and B, and thereby a modest y and a substantial x.From the model one can deduce an important conclusion: If the agents are induced to prefer values of A and B higher than their current counter parts, and if costs of increasing A and B can be substantially reduced, the society would move to a new state with higher A and B. As the higher A and B would make y larger and x smaller, the economy would end up at a very desirable state.More importantly, as the society moves to a higher y and a smaller x, the economy would experience green economic growth. As it is modeled here, this kind of growth is only a transitory phenomenon. However, the transition might take a long period of time and the society can experience economic growth for an extended period of time.Now if A and B can be made to get bigger and bigger, then boost in economic growth could be made somewhat permanent.In sum, the green growth strategy can be viewed as a set of actions that would induce agents to put more emphasis on larger y and a smaller x and would reduce the costs of increasing y and reducing x. As we have seen, when this is successful, the society would move to higher y and a smaller x: People get wealthier and the environment gets cleaner.All right, this is what I have prepared. Now let us here what Professor Lucas or Stokey would say about the issues.PAGE PAGE 53 D E F 1 3 R [
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