The assumption underlying the Kuznets Curve is that environmental degradation increases with the industrialization of countries. Many evidences, however, suggests that we shouldn't really trust this hypothesis. 

Giulia

The Kuznets curve is a graphical representation of the relationship between economic growth and environmental degradation. The adaptation, presenting the approach to the Kuznets curve, was popularized by the economists Grossman and Krueger.
In the Environmental Kuznets Curve (EKC), the assumption is that environmental degradation increases with the industrialization of countries. However, at a critical point, degradation starts to decrease.
In a sample over 42 countries, scholars Grossman and Krueger found the correlation with two air pollutants: sulfur dioxide and smoke. The concentration was higher with low levels of GDP per capita and decreased with its growth. Also, the critical level was identified between $ 4-5,000, after which pollution begins to decrease.
<h3> What factors explain the shape of the environmental Kuznets curve?</h3>
Some of the elements that various specialists use to explain the environmental Kuznets curve are:
<ul><li>Production structure: as an economy develops, the composition of the products changes. The share of sectors with lower emission intensity absorb a greater share of GDP. For example, the extraction of natural resources decreased and the weight of the service sector increases;</li></ul>
<ul><li>Technological progress and productivity: both elements are strengthened by economic growth and they tend to reduce pollution levels directly. A clear example of intentionality is the development of renewable energies. Although at the beginning the high investment costs represent a disadvantage, as production becomes more efficient these costs decrease.</li></ul>
<ul><li>Consumption capacity: the availability of extra income makes people more willing to pay more for green products and services;</li></ul>
<ul><li>Regulation: as economic growth is generated, cities tend to use more vehicles. But as pollution deteriorates the standard of living and threaten public health, governments will tend to regulate air pollution levels.</li></ul>
<h3>Criticisms to the environmental Kuznets curve</h3>
Despite Grossman and Krueger&#x27;s findings, some researchers argue that there is not enough evidence to support the hypothesis of the Kuzents curve. 
First of all, the reduction in pollutants stated by Grossman and Krueger do not occur for all pollutants. For example, their existence has been documented for SO2, but less for CO2. Secondly, their presence in one country may be the result of the displacement of polluting productions in another country, so that geographically the overall balance would not always be positive for the criticalities of the EKC. In addition, as long as advanced economies can reduce their pollution levels, they persist in importing goods from emerging economies. In this sense, indirect environmental degradation should be also take into account when processing the curve. Moreover, some economists say that as long as a country expands its production, it will continue to need environmental resources to sustain it. 
(water and soil purification, climate mitigation, carbon sequestration, pollination)The deterioration of resources and biodiversity also entails very high procurement costs which translate into higher prices for final products and services. Also important to underline once again that the ecosystem services that nature gives us for free have a very high cost for the economy as they degrade and cannot often be replaced by humans works. Therefore, a sustainable business model, in addition to customer and other stakeholder loyalty, also protects public spending, the markets and the health care.
However, one non-trivial question remains: can progress really be achieved through an economic structure different from the current one?
Certainly it is possible. By focusing on a sustainable and circular economic approach, we can exponentially increase the economic revenue, going to generate social and environmental value, which in turns increases natural and human capital, which are closely linked to the economic capital.
Future Thought Leaders is a democratic space presenting the thoughts and opinions of rising Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.

The Kuznets Environmental Curve: From Industrialization to Degradation

The environment and the nature have never been considered in the calculation of the GDP (Gross Domestic Product). However, scientists and economists from Stanford and the Chinese Academy of Skins have studied a value which takes it into account the value of the natural ecosystems: the Gross Ecosystem Product (GEP).

Thanks to the GEP, the GDP is completed and extended with all the environmental assets, by restoring dignity to the Earth.
The GEP was also tested in Qinghai Province, in China, by the team of researchers who devised the GEP concept, led by Zhiyun Ouyang, Director of the Environmental Research Center of the China Academy of Sciences. This place has a wonderful nature and is located at over 3000 meters above sea level. It is also called &quot;the Water Tower of Asia&quot;, as from there there are many of the rivers that bring this precious liquid throughout the territory.
The GEP allows governments of institutions to not underestimate the compromises between the different positions to be taken for the conservation of natural resources. GDP, in fact, widely used by decision-makers around the world, summarizes the value of all goods and services purchased and sold in a country during a certain period. But GDP does not take into account how nature affects the economy and the whole human well-being.
This omission is &quot;critical&quot; and disadvantageous. It is necessary to study ecosystem services in different areas of the globe and make concrete proposals for sustainability that integrate the economy with the ecology and society.
Indeed, ecosystem products and services are essential for human survival and for the development. The Gross Ecosystem Product (GEP) targets specific indicators to measure their total economic value. The GEP indicates the total value of ecosystem goods and services provided to human well-being in a region each year and can be measured in terms of biophysical value and monetary value. Ecosystems that can be measured include natural ecosystems such as: forests, grasslands, wetlands, deserts, fresh and ocean waters but also man-made systems that rely on natural processes such as: agricultural land, pastures, aquaculture farms, green areas urban.
In China, the researchers were able not only to put Qinghai Province&#x27;s ecosystems on the balance sheet, but also to show that only a third of the economic value generated by the province&#x27;s ecosystems is provided to its residents, while the rest is exported to other provinces of China and other countries of the world. This brings out the importance of the connection between humans and nature not only within a place, but also in near and far places on the planet.
A report produced in collaboration with PricewaterhouseCoopers (PwC) was presented at the World Economic Forum (WEF) in Davos last January, by indicating that half of the world&#x27;s GDP depends on nature and by warning companies about their significant &quot;hidden dependences&quot; to nature. Their supply chain could be much more at risk of being disrupted than expected. Moreover, the WEF&#x27;s annual &quot;Global Risk Report&quot; highlighted how the risk of biodiversity loss is an indicator of the 750 experts and decision-makers who contributed to its drafting among the greatest risks that may occur (4th place) and among those of greatest impact (3rd place) in terms of well-being for humanity.
In fact, the exploitation of resources and biodiversity also entails very high procurement costs which causes higher prices for final products and services. We should also add the costs of externalities (environmental and health damage), thus by creating a vicious circle that triggers economic crises. The solution is to generate profits to create social and environmental value, by adopting sustainable business models that measure and minimize the impact on natural and social capital. This means to prevent economic crises and pandemics such as Covid-19, as well as creating jobs and reducing inequalities.
The &quot;Wealth of Nations&quot; has always been measured by GDP, outlined by Adam Smith. This has led to a society that produces and consumes far more than it has at its disposal. Now there is another parameter: the GEP (Gross Ecosystem Product), which admits Nature, by recognizing its value (also economic).
Extracting, producing, selling and producing waste: this linear economic model increases a nation&#x27;s GDP, its productive power and, of course, the consequences that come from it. Yet this logic has brought the planet into a situation of dangerous imbalance. It is not possible to have infinite growth in a world where resources are finite. The way we produce and consume must be adapted to the biophysical cycles of the Earth and respect their balance.
The fact that the GDP dealt with money, has had - over time - its negative effects: it is still the value most considered and monitored by nations but it has never taken into account the well-being of people.
One of the most beautiful confirmations of this theory comes from the famous &quot;Easterline paradox&quot; or paradox of happiness.
A very simple concept, introduced in 1974 by Easterlin, a professor of economics at the University of Southern California and a member of the National Academy of Sciences, according to which people&#x27;s happiness depends just for a little part by the economic conditions.
 There are three aspects of happiness linked to the economic model:
<ul><li>hedonic treadmill: hedonic happiness, which is seen in relation to the theory of adaptation: you have a need, you consume and satisfy the need, but then you adapt and you have a new need;</li></ul>
<ul><li>satisfaction treadmill: the level of happiness is linked to the achievement of goals and the consequence, but the goals are higher and higher and the happiness farther away;</li></ul>
<ul><li>positional treadmill: the gain of a position or a social role.</li></ul>
So one thing is certain: we need to start to rethink our impact on the planet. We must stop believing that sustainability is synonymous with renunciation or degrowth. It is exactly the opposite.
Having a sustainable way of producing and consuming, in harmony with the resources of the planet, allows us to progress as a species, be healthy and economically safe. Otherwise, we would be just a passage through the many geological eras.
Future Thought Leaders is a democratic space presenting the thoughts and opinions of rising Energy &amp; Sustainability writers, their opinions do not necessarily represent those of Illuminem.

The GEP will replace the GDP in the world economies

The Covid-19 pandemic has given a strong boost to the economic scenario, and in this regard, the benefits of companies have also increased. Compared to how it was seen until recently, investing according to ESG criteria today is, for experts, a model capable of returning extended value also to subjects outside the investment, and the only way to fair progress.



The Covid-19 pandemic has given a strong boost to the economic scenario, and in this regard, the benefits of companies have also increased. Compared to how it was seen until recently, investing according to ESG criteria today is, for experts, a model capable of returning extended value also to subjects outside the investment, and the only way to fair progress.
Finally, the strong correlation between economy and environment is emerging: just think of the fact that every company, for any process, depends on natural resources and continuing to run out of stocks without a correct allocation of resources can only lead to an increase in the price of raw materials. Then, they generate costs to be incurred for environmental and health damage (such as Covid) and therefore economic crises. The exploitation of resources-externalities-crisis is a vicious circle. In fact, a sustainable business model is profitable precisely because it responds to social-environmental needs that will never have an end for man.
Sustainable finance makes a link, in a long-term vision, between financial performance and the creation of a shared social value. It also includes the mitigation of environmental risks and inequalities generated by economic activity. The assets managed according to the criteria of sustainability work because they lead to critically think about the &quot;quality&quot; of the proposed strategies and their &quot;need&quot;, or rather whether to respond to a structural change in the market and social needs or are a passing fad.
The empirical analysis conducted by international scholars states that strategies based on the ESG criteria offer a benefit in terms of portfolio risk reduction, compared to traditional investment models. The strong relationship that binds environmental well-being to progress and economic equilibrium therefore emerges.
This is because companies with business models defined on ESG criteria and SDGs are the only ones able to respond to social-environmental problems and needs, with products and services suitable to solve them. Furthermore, it allows to reduce the risk of rising prices on raw materials, due to the exploitation of resource stocks and their incorrect allocation. This cycle involves enormous externalities that generate costs related to environmental and health damage (such as Covid) which in turn cause economic crisis by fueling a vicious circle.
Economic prosperity is not a harm, but it becomes a beneficial consequence for human progress if the money is used for the benefit of the community. We must look at the quality of the profits, that is, both how to obtain them and how to use them once they are acquired.
Sustainable finance is the application of the concept of sustainable development to a financial activity. Sustainable finance aims to create value in the long term, by directing capital towards long-term activities that, in addition to generating an economic surplus, are also useful for society and do not compromise natural resources and the environment in general.
Sustainable development means that we must continue to grow, but with an eye on future generations. Indeed, there is more: environmental and social projects can become the engine for the development of our economy. Here the world of finance, which in the imagination of most people is just greedy speculation, becomes much more. In other words, sustainable finance is capable of changing (for the better) the world, by shifting resources towards responsible activities towards the planet and people.
Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.

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Giulia Faleri

Giulia Faleri

The Kuznets Environmental Curve: From Industrialization to Degradation

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