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In this chapter, we develop a model for analyzing the economic impact of environmental measures by incorporating environmental costs into the Kaleckian model. The model is composed of equations explaining profit rate, savings, investment, and import and export by using variables such as capacity utilization rate, profit share, and environmental-measure cost. By analyzing this model with a focus on changes in capacity utilization and profit rate, it is shown that an increase in environmental-measure cost can lead to higher capacity utilization and profit rates under certain conditions.
Strengthened environmental measures, while raising production costs, alter the I-S balance and raise capacity utilization. Thus, they may raise profit rate when investment is sensitive to capacity utilization and importation is not so sensitive to it. Moreover, environmental measures have the effect of reducing imports of natural resources, inducing investment in environmental equipment and facilities in the short term, and strengthening export competitiveness by encouraging innovations in the mid- to long-term. These combined effects enlarge the possibility of raising capacity utilization and profit rates.
We present these effects in the model and identify conditions for them to raise profit rates, which formally explains the mechanism and conditions of the “paradox of costs” for environmental measures as well as Green Growth.
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This approach of integrating distribution equation and Kaleckian growth model is based on the recognition that changes in distribution affect the amount of surplus itself, and thus the surplus approach of the classical tradition and the effective-demand principle of the Keynesian and Kaleckian tradition can be integrated (Bortis 1996; Uemura 2007).
We use a Kaleckian model because of our emphasis on the relation between costs of environmental measures and demand. There can be other approaches on the common basis of régulation theory or post-Keynesian theory. For example, Uni ( 2011) took steps to apply the cumulative causation model as in Boyer ( 1988) to environmental issues by estimating the “productivity regime in a broader sense” and considering its institutional implications.
Although the current size of environmental elements in distribution is far smaller than wage and profit, a study has indicated that the costs of additional countermeasures against global warming will go beyond 2% of the GDP in Japan’s case (Central Environment Policy Council 2010). This size together with the speed of change indicates the possible impact on the economy, which justifies this way of modeling as one of the possible approaches.
Though strictly this relation is not linear in view of increasing marginal costs, linear expression can be employed for simplicity in this model designed to analyze the impacts of marginal change in e.
This way of formulation is in line with models of conflict theory of inflation (e.g., Cassetti 2003).
Pollution-prevention expenditures in Japanese enterprises in the 1970s were covered by a reduction of profits and other cost cuts rather than raising prices (Environment Agency 1992).
Rent normalized by capital stock are transformed as follows: R/ pK = ρN/ pK = ρN p / pK p = R s pY/ pK p = R s uv p
This model abstracts from government deficit, which could be added to the right side for a more precise presentation of the saving–investment balance, on the assumption that it is not determined by a function of variables such as e, u, and r, but by policy factors.
In this model with import, g i = g s does not hold and g i is not directly linked to r, which precludes the simple analysis of the accumulation rate as in the basic model in the previous section. It is a remaining issue to be studied, to develop methods that clearly present impacts on the accumulation rate.
Keynesian stability condition, meaning that a rise in capacity utilization reduces excessive demand, is presented as [ s r π p v p – ( γ u − m u ) > 0] in this model.
We use here a method for analysis using graphical presentations, which is one of the Kaleckian traditions, in view of applying it to the analysis of dynamic effects in Sect. 6.3. One can obtain the same results by applying a method that uses total differentials.
In Japan, total private investment was generally constant during the 1970s in spite of the oil crisis. In this period, pollution abatement investments expanded and their ratio to total investments soared to nearly 20% around 1975, which should have supported the level of total investment. A macro-econometric model study estimated that the antipollution measures induced a 7.4% increase in total private investments in 1975 (Environment Agency 1992).
Since consumption of ESGSs has a tendency to grow, as discussed in Chap. 3, we can assume Δ E/ K as positive in general.
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- A Kaleckian Model for Economy-Environment Analysis
- Springer Singapore
- Chapter 6
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