policies to mitigate the impact of economic growth on the environment and climate change

Economic Growth, Inclusivity & Sustainability (Cambridge AS & A‑Level – Topic 9 & 11)

1. Core Concepts (AO1)

• Potential vs. Actual Output
  • Potential output = economy’s long‑run productive capacity (LRAS).
  • Actual output = current real GDP (intersection of AD and SRAS).
  • Output‑gap formula: output‑gap = (Y – Y*) / Y*, where Y = actual output, Y* = potential output.
  • Positive gap → inflationary pressure; negative gap → under‑utilised resources.
• Economic Growth – Causes & Measurement
  • Long‑run growth drivers: technology, human capital, physical capital, institutional quality (property rights, stable macro‑policy).
  • Measurement:
    • Real GDP (constant‑price output) – main growth indicator.
    • GNI, NNI – incorporate net factor income from abroad.
    • PPP‑adjusted GDP – for cross‑country comparison.
    • Nominal vs. real growth – inflation‑adjusted vs. current‑price growth.
• Business‑Cycle Phases & the Multiplier
  • Phases: expansion, peak, contraction (recession), trough.
  • Fiscal multiplier: ΔY = k·ΔG where k = 1/(1‑MPC) (MPC = marginal propensity to consume).
  • Monetary multiplier (money‑supply multiplier): k = 1/rr where rr = reserve ratio.
  • Policy implication – a rise in government spending or a cut in taxes can shift AD rightwards by a multiple of the initial change.
• Inclusive & Sustainable Growth
  • Inclusive growth – rise in real GDP that is shared broadly (higher employment, real wages, reduced poverty).
  • Sustainable growth – growth that does not compromise the ability of future generations to meet their needs; must respect environmental limits and climate‑change targets.
• Kuznets Curve – inverted‑U relationship between per‑capita income and environmental degradation; suggests a short‑run trade‑off that may reverse as income rises and cleaner technologies are adopted.
• Equity vs. Efficiency Trade‑off – policies that improve environmental quality can raise production costs (efficiency loss) but can be designed to protect low‑income groups (equity).

2. Policy Instruments that Mitigate Environmental Impact (AO1‑AO2)

2.1 Market‑Based Instruments

1. Carbon Pricing
   • Carbon Tax – fixed levy per tonne of CO₂ emitted.
   • Cap‑and‑Trade (Emissions Trading System – ETS) – firm‑wide cap on total emissions with tradable permits.
   • Both internalise the external cost of greenhouse‑gas emissions and create a price signal for abatement.
2. Renewable‑Energy Subsidies
   • Feed‑in tariffs (FIT) – guaranteed above‑market price for renewable electricity.
   • Renewable Obligation Certificates (ROCs) – tradable certificates for each MWh of renewable generation.
   • Capital‑tax credits for wind, solar, hydro, etc.
3. Energy‑Efficiency Incentives
   • Building codes – minimum insulation, glazing and heating standards.
   • Energy Performance Certificates (EPCs) – mandatory ratings for residential & commercial buildings.
   • Industrial grants for process upgrades and waste‑heat recovery.
   • Energy‑use relationship: E = Q / η where E = energy consumed, Q = output, η = efficiency.

2.2 Regulatory & Structural Measures

• Green Infrastructure & Public Transport
  • High‑speed & electrified rail networks.
  • Integrated bike‑sharing, low‑emission bus fleets, congestion charging.
  • Urban green spaces & tree‑planting (carbon sinks).
• Circular‑Economy Policies
  • Extended Producer Responsibility (EPR) – producers finance collection, recycling and disposal.
  • Mandatory recycling targets for plastics, paper, metals.
  • Design‑for‑repair & modularity standards to extend product lifespans.
• Regulatory Standards
  • Emission limits for vehicles (Euro standards) and industry.
  • Ban on certain high‑GWP (global‑warming‑potential) refrigerants.

3. Policies that Promote Inclusive & Sustainable Growth (Beyond the Environment)

• Human‑Capital Development – public spending on education, vocational training and health improves labour productivity and reduces inequality.
• Research & Development (R&D) Incentives – tax reliefs, grants and innovation clusters accelerate green‑technology adoption and shift LRAS rightwards.
• Public‑Goods Provision – investment in clean water, sanitation, broadband and resilient infrastructure expands the base for inclusive growth.
• Social‑Welfare Measures – targeted cash transfers, universal credit or energy‑voucher schemes protect low‑income households from any regressive effects of green taxes.
• Green Fiscal Measures – removal of fossil‑fuel subsidies and recycling of carbon‑price revenue into green public‑goods or welfare programmes.

4. Impact of Policies on the AD‑AS Model (AO2‑AO3)

5. Policy Evaluation Framework (AO3)

When answering exam questions, evaluate each instrument against the four standard criteria. State assumptions, limitations and possible unintended consequences.

1. Environmental Effectiveness
   • Quantify expected CO₂ reduction (e.g., tonnes/yr or % of emissions).
   • Assumption: emissions respond proportionally to the price signal.
   • Limitation: leakage (production moving abroad), measurement error, “green‑wash”.
2. Economic Impact
   • Effect on GDP growth, employment, inflation and the output gap.
   • Assumption: markets are competitive and price‑elastic.
   • Limitation: short‑run cost‑push inflation vs. long‑run productivity gains; possible impact on trade balance.
3. Equity (Distributional) Impact
   • Who bears the cost (low‑income households, small firms) and who gains (clean‑air benefits, green‑jobs).
   • Assumption: households spend a constant proportion of income on energy.
   • Limitation: regressive effects can be mitigated only if revenue recycling is well‑designed.
4. Political & Administrative Feasibility
   • Public acceptance, lobbying power of affected industries, administrative capacity.
   • Assumption: government can enforce compliance and prevent fraud.
   • Limitation: policy may be delayed, diluted or abandoned due to political compromise.

6. Comparative Case‑Study Table (Key Instruments)

7. Suggested Diagrams for Exam Answers (AO2)

• Carbon Tax vs. Cap‑and‑Trade – supply‑and‑demand for emissions permits: a tax sets a price line; a cap fixes quantity and lets price adjust.
• AD‑AS impact of a Carbon Tax with Revenue Recycling – show SRAS left‑shift (cost‑push) and AD right‑shift (government spending), resulting in a new equilibrium with higher price but limited output loss.
• Kuznets Curve – sketch per‑capita GDP on the horizontal axis and environmental degradation on the vertical axis; annotate the “turning point” and note how strong green policies can shift the curve leftwards.
• Output‑Gap Diagram – LRAS vertical, SRAS upward‑sloping, AD intersecting SRAS; shade the gap between Y and Y* and label inflationary/deflationary pressures.
• Multiplier Effect of Government Spending on Green Infrastructure – illustrate initial AD right‑shift, subsequent rounds of income‑spending, and final equilibrium.

8. Summary Checklist (What candidates must be able to do)

1. Define inclusive and sustainable growth and explain the output‑gap framework using the AD‑AS diagram.
2. Identify and describe the main drivers of long‑run economic growth and the ways it is measured.
3. Explain the business‑cycle phases and calculate the fiscal multiplier (including assumptions about MPC).
4. Describe at least five policy instruments that mitigate environmental impact, stating how each works and its likely short‑run and long‑run AD‑AS effects.
5. Analyse how human‑capital, R&D and green‑fiscal policies contribute to inclusive & sustainable growth.
6. Evaluate any instrument against the four AO3 criteria, explicitly stating assumptions, limitations and possible unintended consequences.
7. Use appropriate diagrams to support analysis and evaluation.

9. Quick Reference – Key Formulas

• Output gap: (Y – Y*) / Y*
• Fiscal multiplier: k = 1 / (1 – MPC)
• Money‑supply multiplier: k = 1 / rr
• Energy use: E = Q / η