The Environmental Paradox of Economic Slowdown

While the effects of economic development on environmental degradation in the short-run are well established; the ongoing financial and economic crisis may actually hamper development and adoption of alternative energy that is so vital for sustainable economic development.

Deutsche Bank forecasted the economic slowdown will cause Europe's industrial CO2 emissions to fall by about 100 million tonnes next year compared with last year. Australian Climate Exchange, which operates a joint-venture trading platform for carbon offsets and abatement credits, said economic cycles were linked to emission trajectories. As a result of this economic slowdown, carbon emissions at major industrial nations are likely to remain inside their Kyoto cap.

Kuznets curve is the graphical representation of Simon Kuznets's theory that economic inequality increases over time while a country is developing, then after a critical average income is attained, begins to decrease.

Another situation where the Kuznets curve is alleged to appear is the environment. Many environmental health indicators, such as water and air pollution, show the inverted U-shaped curve. The argument for the environmental Kuznet's curve is based on the following argument. In a developing industrial economy, little weight is given to environmental concerns, raising environmental pollution byproducts. After attaining a certain standard of living from the industrial production system and when environmental pollution is at its greatest, the focus changes from self-interest to social interest. The interests give greater weight to a clean environment by reducing and reversing the environmental pollution trend from industrialization. This parabolic trend occurs in the level of many of the environmental pollutants, such as sulfur dioxide, nitrogen oxide, lead, DDT, chlorofluorocarbons, sewage, and other chemicals previously released directly into the air or water.

A recent New York Times column argued that for all the support that the presidential candidates are expressing for renewable energy, alternative energies like wind and solar are facing big new challenges - because of the credit freeze and the plunge in oil and natural gas prices. The column states that advocates are concerned that if the prices for oil and gas keep falling, the incentive for utilities and consumers to buy expensive renewable energy will shrink. That is what happened in the 1980s when a decade of advances for alternative energy collapsed amid falling prices for conventional fuels.

Venture capital financing for some advanced solar projects and for experimental biofuels, like ethanol made from plant wastes, is drying up. Worldwide project financings for new construction of wind, solar, biofuels and other alternative energy projects this year fell to $17.8 billion in the third quarter, from $23.2 billion in the second quarter, according to New Energy Finance, a research firm in London.

Renewable energy now meets 7 percent of America’s energy needs. Renewable energy has become a big business worldwide, with total investment increasing to $148.4 billion last year, from $33.4 billion in 2004, according to Ethan Zindler, head of North American research at New Energy Finance.

The current financial and economic crisis is indeed a paradox for environmental sustainability. While it may slowdown the pace of environmental degradation in the short-run due to reduced demand – in the long run, an economic slowdown will undoubtedly prove to be a disincentive for development and adoption of clean energy.