Economic Growth and the Environment: Friends or Foes? : The Environmental Kuznets Curve for CO2 Emissions

The relationship between certain indicators of environmental quality and income, which in some cases has shows an inverted-U relationship, has been called The Environmental Kuznets Curve. The implications of this relationship in terms of economic and environmental policy are important. If there is reason to believe that environmental quality will improve after a certain income level, encouragement of economic growth will be optimal. If this relationship does not exist, a lack of focus on environmental problems can lead to potentially dramatic consequences. This paper explores the mechanisms behind the relationship, and for which pollutants the relationship exists. Specifically, the mechanisms can be categorized into income effects, and in relation to this, responsive democracies to act according to the demand of the populations, international trade and resource prices. Income effects can be described as the changes in preferences that come about due to increases in income. It is expected that the willingness to pay for a clean environment is low when income is low, and increases along with economic growth. Some theories have been put forth assuming thresholds in income, output or pollution. Only when the thresholds are passed environmental quality is prioritized, or it improves due to increasing returns in abatement. International trade can be thought of “pollution leakage”: as countries become developed, the dirty industries producing pollution-intensive goods move to less developed countries, while the goods are exported back to the developed countries. According to Hotelling’s rule, resource prices will increase as the resource becomes scarcer in supply, and this will bring about a shift in demand away from the resource to alternative resources as well as intensification per unit of the resource used. The characteristics of the pollutants are crucial in establishing the relationship with income also. Roughly speaking, the pollutants can be categorized into local and global pollutants, respectively. Local pollutants have direct effects on the polluters, and pose fewer problems with regard to policy in terms of preserving the environment. Global pollutants, on the other hand, are greenhouse gases (GHGs) that accumulate in the atmosphere, and thus have global impacts that affect not only the global population today, but also in the future. Carbon dioxide (CO2) is one such global pollutant, According to the Intergovernmental Panel on Climate Change (IPCC), emissions resulting from human activities are substantially increasing the atmospheric concentrations of greenhouse gases, resulting on average in an additional warming of the Earth’s surface. Empirical evidence shows that significant EKCs exist only for local air pollutants, while indicators with a more global, more indirect, environmental impact either increase with income or else have high turning points with large standard errors