Air pollution and 'dirty' industries: How and why does the composition of manufacturing output change with economic development ?

This paper examines the impact on air pollution of changes in the compositi on of manufacturing output in developed and developing countries. Pollution emissions from manufacturing output are estimated in a manner which holds constant the effect of technology and regulations allowing the impact of co mpositional changes alone on pollution to be estimated. The paper has three main findings; (1) the inverted-U estimated between per capita income and the pollution intensity of GDP arises due to both the composition of manufa cturing becoming cleaner and the share of manufacturing output in GDP falli ng. Compositional changes alone are not responsible for the inverted-U betw een per capita income and per capita emissions; (2) changes to the composit ion of manufacturing output are consistent with the pollution haven hypothe sis, however there is clear evidence that rising per capita incomes are ass ociated with a falling income elasticity of demand for 'dirty' products. Th is fact may explain the compositional changes that occur with development; (3) in addition to the income elasticity effect, the analysis suggests that land prices and to a lesser extent the prices of labour and capital, deter mine the proportion of dirty industry within a country's manufacturing sect or.