Improvements in environmental quality will boost output production and hence economic growth. However, although environmental abatement equally benefits all economies in the world, it is shown that, if the private productive resources are not yet accumulated sufficiently in low income economies, income inequality among economies can be widened in the short term not only under equal burden sharing of pollution abatement but even under income-proportional burden sharing. When the marginal productivity is diminishing, the negative effect of the burden is large relative to the positive effect of the improved environment in economies in which resources are not accumulated sufficiently.
It is well recognized that international coordination among countries is required to successfully deal with the global environmental problems. In fact, the issue of climate changes was a major topic at Heiligendamm in 2007 and the Bali and Hokkaido–Toyako Summits in 2008. As a step towards such international coordination, the Kyoto Protocol was formulated in 1997 and, after Russia ratified it, came into effect in 2005. While thirty-seven developing countries have ratified the protocol, including Brazil, China and India, they have no obligation beyond monitoring and reporting emissions, since they are considered developing countries with other serious problems to overcome. The Stern Review supports this view and stated that rich countries should bear the major responsibility for providing the resources for adjustment at least for the next few years. There seems to be wide agreement that if emissions continue unabated, the world will experience a radical transformation of its climate and that deep emission cuts will be required to stabilize greenhouse gas concentrations (see, for example, Intergovernmental Panel on Climate Change, 2007, Stern, 2007 and Gore, 2006). Thus, the questions are (i) how much pollution emission should be reduced and/or abated and (ii) how the burdens should be shared among economies of various incomes.1
In the present study, extending the two-economy model of Glomm and Ravikumar (2003) by incorporating environmental variables, and focusing mainly on question (ii) mentioned above, we examine the effects of different cost sharing schemes of pollution abatement among countries on their development paths thereafter. As to question (i), we assume here that the abatement conserves the environmental quality at least in the long term. Although the real problem is the international coordination required, it is well known that provision of public goods (i.e., the environmental quality in our context) involves the issue of incentive incompatibility of agents, and thereby the coordination may be difficult. In fact, the Hokkaido—Toyako Summit in 2008 did not seem to make any decisive step towards the coordination, although not only G8 members but also countries such as Brazil, Indonesia, Mexico, and South Africa declared their commitment to combat climate change. Developing countries refuse to be the only ones to shoulder the costs of the new environmental constraints, although industrialized countries are inclined to require them to be clean in their industrialization.2 However, the consequences of the sharing schemes, when such coordination is possible, are worth examining, in particular, for ongoing coordination in the future.3
We show that income inequality may be widened in the short term not only under equal burden sharing of global pollution abatement but also even under income-proportional burden sharing if the productive resources (human capital in the present study) have not been accumulated sufficiently. When the income level is low, the burden of environmental abatement is relatively great because of its low resource accumulation, and the benefits from pollution abatement will be smaller relative to the burden under the diminishing marginal productivity. Thus, although the burden of abatement is smaller for a low income economy under the income-proportional sharing scheme, an increase in output brought about by the improvement of the global environment quality may be more than offset by a decrease due to the burden of the abatement when the productive resources are not sufficiently accumulated.
The next section builds up a model of income inequality between two economies, and then Section 3 examines the properties of the time path of the income ratio of the economies. However, it is difficult to derive clear-cut results qualitatively, since the dynamic system of the model is highly complex. Section 4 presents the results of some numerical calculations. The last section concludes the paper.
Focusing on the evolution of the income inequality under different burden sharing schemes of pollution abatement cost, we have employed a very simple model. Since not only most functions are specified but also some parameters in the numerical calculation are given ad hoc, the model may be far from the reality. However, to our knowledge, the previous literature has not shown that although environmental abatement benefits all economies equally, the income inequality may grow wider in the short term even by the income-proportional burden sharing scheme for pollution abatement activities when the private productive resource accumulation is relatively insufficient. On the other hand, the level and growth of income of rich countries are important to eliminate income inequality between rich and poor countries. These results imply that if the accumulated resources in a developing economy are still relatively small, even an income-proportional burden sharing scheme of pollution abatement may have a severe impact on the relative income position in the world at least in the short term, and that the burdens must not severely harm the accumulation of productive resources in rich countries. Taking into account that one period in the present study is supposed to consist of around twenty-five years, expansions of income gap, even in several periods, may not be tolerable for low-income countries. In that case, the burdens on them should be waived until sufficient resources are accumulated in those economies. More empirical research will be needed to validate the results.
We have abstracted from technological progress in pollution abatement and in output production. This does not mean that technological progress is not important for the environmental issue. We have also neglected strategic behaviors of economies. In the real world, strategic behaviors play important roles in achieving coordination among countries, e.g., in COP's. However, the present study suggests that the possible consequences of the burden sharing schemes, where such coordination is possible, are worth examining.
