When Economic Development Clashes With the Environment: Analysis and Solutions

Lakshya Bharadwaj
A Chinese coal plant bellows smoke (ineteconomics.org)
A Chinese coal plant bellows smoke (ineteconomics.org)

Whenever economic development is sought, policymakers need to be prepared for social and environmental costs, among many others. A cost-benefit analysis for any economic project is incomplete without factoring in the effect of this advancement on the environment. Many scholars and professionals in the business sector argue that economic development is the best approach at ensuring environmental conservation. On the other hand, leading environmentalists are known to oppose capital projects and other such acts of economic expansion on the grounds that the toll of such activity on ecological systems and nature is quite high.

In this paper, some key points of clash between economic development and environmental protection are analyzed. Owing to the nature of this piece, while a detailed exploration is avoided, a summary of major issues is included, followed by an overview of possible reconciliations.

The Underlying Philosophy That Drives This Conflict

Without going into a detailed statistical analysis and the presentation of case studies, it is still possible to observe why the economy and the environment might often be at odds. In the study of economics, all decisions have consequences. These consequences are frequently called opportunity costs. It is unwise to measure the cost of an undertaking in just monetary terms. More realistically, the cost of an activity should capture the cost of opportunities forgone in favor of that particular activity. When it comes to the construction of an oil pipeline or the clearing of a forested area to establish an industrial supply system, the opportunity cost includes the value of the natural resources sacrificed. As is evident, there is no escaping some form of loss. The idea, nevertheless, is to find a balance that allows us to develop and prosper while still keeping the environment relatively free of deterioration.

Policy Trends and Historical Developments

The late Indian Prime Minister Indira Gandhi remarked in Stockholm, Sweden, in 1972, that a poor nation could not afford to work for environmental justice[1]. Mrs. Gandhi attributed environmental degradation to poverty and other economically undesirable conditions. According to her vision, we could not become an environmentally conscious country until we ensured a balanced and sustainable growth of our economy and uplifted our impoverished population. This thinking exhibited a pragmatic understanding of the conflict between the economy and the environment.

From a policy perspective, it is important to create incentives for environmental consciousness. In an ideal world, citizens would be concerned about environmental protection independently of economic development. Since poverty and scarcity of resources are tangible problems, means of livelihood usually take precedence over environmental conservation in a country like India. Once basic needs are met, people begin caring about “secondary” issues such as the environment.

Poverty Rates in India (Source: Vox EU)
Poverty Rates in India (Source: Vox EU)

According to economists from Mumbai University, half of the Indian population now belongs to the middle class by income. This classification is dependent on daily household expenditures, which need to be between $2 and $10 for a family to be categorized as a middle-class household.[2] This denotes a positive trend since 1991 when only about 1 percent of the Indian population belonged to the economic middle class. As far as progress in the field of environmental conservation is concerned, this trend is good news. With an increased rate of poverty alleviation and the expansion of the middle class, comes a higher level of environmental consciousness. Policymaking needs to be aimed at the kind of economic strengthening that allows our population to desire a reversal of the damage to our environment.

Possible Reconciliations

When individuals engage in economic behavior that has far-reaching desirable effects, a positive externality is created. Not only are the concerned individuals producing value for themselves, they are also adding value for public benefit. An example of such an externality is the use of solar-powered vehicles by a consumer. While the consumer derives value from reducing her fuel costs, the lack of exhaust fumes from the clean energy-fueled vehicle is also beneficial for the environment. Responsible governments tend to reward these positive externalities. The most common method of rewarding this behavior is subsidization. With subsidization, consumers have an incentive to use certain products that lead to positive externalities.

An example of a policy solution for promoting economic development in tandem with environmental conservation is the Payment for Environment Services (PES) scheme. Under this measure, positive externalities are rewarded through direct monetary payments and other incentives such as concessions in licensing fees. The government provides these benefits to farmers, or to landowners, who put their land to conservational usage such as the fostering of biodiversity. Other environmental services like water harvesting are also rewarded under this scheme. Even though PES is not wildly popular in policy circles yet, some localities have begun experimenting with it. An example of such an experiment can be seen in Mongar Township in Bhutan where locals are incentivized to conserve the community forest. [3]

More commonly, governments prefer to use abatement laws to curb pollution created by economic development. The government fixes a limit for total pollution, and “allows” industries to emit a certain amount of particulate matter without penalty. If factories cross the fixed level of emissions, they have to install mechanisms for the abatement of pollution. These mechanisms range from air filters to noise mufflers. Even here, the free-market marvelously finds a way and gives rise to tradable carbon permits that allow industries with high abatement costs to pollute, given the total pollution levels do not go beyond the stipulated limit. Industries with low abatement costs sell their permits and actually earn profits on this venture that is also supposed to help protect the environment. A major drawback, however, is the uneven distribution of pollution where some areas are more heavily polluted than other areas. In India, this emissions trading system has been instituted in the densely industrialized city of Surat in Gujarat where factories may not release more than 150 milligram per cubic meter of particulate matter. [4]

Final Thoughts and Conclusion

The environment and the economy are always bound to collide, given the dependence of economic development on environmental resources. Policymakers are aware that economic progress is built upon exploited natural resources. If the vision is that of industrialization, the preparedness should also be against the secretion of effluents into rivers and the land around factories. If roads need to be constructed so as to ensure market access for agricultural products, policymaking will also have to take into account the environmental costs of clearing forests. If world-class technological manufacturing is the goal, governments will need to institute policies that compensate for carbon emissions and air pollution.

It is also prudent to strengthen the economy first and bring people out of poverty before we can rely on companies and businesses to “go green”. Once people are confident in their financial positions, they become conscious about the environment. Owing to this, there may lie wisdom in policies that give preference to the economy in the initial stage, but later shift their focus onto environmental conservation along with economic progress.

[1] Debajit Sarkar, ‘Environmental Policy in India’ (2014) 3 ARSS 17

[2] Abhijit Roy, ‘The Middle Class in India: From 1947 to the Present and Beyond’ (2018) 23 Asian Politics 32

[3] Bhattacharya and Tangri, ‘Sustainable Economic Development of India and the Role of Biodiversity’ [2017] CUTS International 1.

[4] ‘India Air Pollution: Will Gujarat’s ‘cap and trade’ programme work? BBC News (Asia, 12 July 2019)

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