Is Caring for the Environment a Luxury Good?

I finally got hold of a library copy of Naked Economics: Undressing the Dismal Science by Charles Wheelan. In the first chapter The Power of Markets Wheelan notes that

“concern for the environment is a luxury good” (2012, p.7).

The argument is the following if I get it right: People with higher incomes can basically afford to care, whereas poorer people have a smaller fraction of their incomes available to spend on environmentally-conscious goods as more of their income goes towards necessities. Intuitively I agree with Wheelan. Environmentalism carries a hefty price tag in today’s economy which is counterproductive to promoting sustainability. If one wants to cater for the mass market it is all about prices; they create the incentives to buy and not their ‘environmental-friendliness’ grading. If sustainable products become cheaper than the conventional alternatives, this induces people to change their consumption pattern. They will substitute something for the more sustainable alternative and will thereby also make society better off in the long run (positive externality).

But here is today’s question: if a sense for environmentalism does increase with income, does this also hold for countries? Do countries care more about the environment as they get richer? It is not an easy question but I’ll try to come up with some data for a short post today. I went to the OECD’s Green Growth Indicators and downloaded the following indicators to STATA for the 34 OECD countries for the period 2000 to 2012:

  • Real GDP per capita
  • Development of environment-related technologies, inventions per capita
  • Municipal waste generated, kg per capita

Firstly, I want to test whether there is a positive correlation between the countries’ income levels and their focus on research and development in cleaner technologies. The correlation turns out to be 0.48 for my dataset and here is how the story looks like for the latest year available:

Real GDP per capita vs Inventions per capita 2012

There is a positive relationship between inventions per capita and real GDP per capita in the data. However, there are considerable outliers worth looking at. Firstly, there is Luxembourg which is isolated from the rest of the OECD countries. It could be a negative outlier given its high income level, i.e. the inventions per capita predicted might be higher than observed. Then there is a cluster of six countries that do not fit into the picture: Austria, Denmark, Finland, Japan, Korea and Germany. Given their income levels they produce more environmentally-related inventions per capita than predicted (positive outliers). For the remainder of countries the variability in outcomes increases with higher income levels (heteroskedasticity). However, the initial hypothesis seems to hold at a crude level. As income levels rise countries tend to develop more environment-related technologies which I take as a proxy for ‘caring for the environment’ here.

Real GDP per capita vs Waste per capita 2012

Before finishing off I want to picture a second story though. People not only care more for the environment as they grow richer, they also consume more, i.e. they become more consumption-oriented. So while richer people can afford to care for the environment they do not necessarily choose to do so. At country level, this might well be depicted in the diagram above. Higher incomes are significantly positively correlated with more waste per capita (0.64) in the dataset. While the innovative outliers Japan and Korea also produce less waste given their income levels and compared to other countries like New Zealand or Israel which are in their income group, the innovative outlier Denmark is actually at the high end of the spectrum in terms of waste together with Switzerland and the USA.

In sum, I would add to the quote from the introduction that while caring for the environment might well be a luxury good there is a second aspect to the discussion at country level: whether a country that can afford to spend more on these more sustainable goods actively chooses to do so and whether it creates the right incentives for its population. If not, then the relationship between income and spending on more environmentally friendly goods, technologies etc. breaks down in practice. Furthermore, there are noteworthy outliers that have decoupled income from innovation in environmental technologies.

Thanks for reading!

Jasse


OECD (2016). Green Growth Indicators Database – Green Growth Indicators (Last updated: April 2016). [Data file] Retrieved from OECD.Stat database: http://stats.oecd.org/Index.aspx?DataSetCode=GREEN_GROWTH#

Wheelan, C. (2012). Naked economics: undressing the dismal science. New York, N.Y.: W.W. Norton & Company.

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