Temporary Prosperity or Sustainable Development: The Long-Run Impact of Developing Pollution Intensive Industries

Abstract

We revisit the Environmental Kuznets Curve (EKC) argument that an economy could pollute and develop at first and reduce pollution as income continues to grow. We propose a dynamic structural model to capture the interaction between economic growth, human capital accumulation, environmental pollution, and abatement. We demonstrate that if pollution has a negative externality on human capital accumulation, the driving force for continuous growth would be muted, and the dirty path of development would finally stagnate at a low level. We further illustrate that the cost for a dirty economy to make a structural change is expensive and even infeasible if the environmental damage is difficult to reverse. Policy interventions in the dirty economy, such as pollution taxes or human capital subsidies, would help alleviate but cannot eradicate the stagnation of a dirty economy.