Environmental Kuznets curves Outline: Does it exist, if so why, and is it policy relevant?EKC definitionExampleExampleEmpirical evidenceThe policy issue?Criticisms of EKCMethodological issuesMethodological issuesStructural explanations1) Consumption and production changes2) Preferences for environmental quality3) Institutions/policy4) Abatement technology5) Dynamic modelingSome conclusionsSome conclusionsAn Incomplete BibliographyEnvironmental Environmental KuznetsKuznetscurvescurvesDefinition: a relationship between Definition: a relationship between environmental quality (emissions) environmental quality (emissions) and per capita GDP leveland per capita GDP levelOutline: Does it exist, if so why, Outline: Does it exist, if so why, and is it policy relevant?and is it policy relevant?Initially, an empirical observation.Initially, an empirical observation.Most studies based on crossMost studies based on cross--country data.country data.Different results with time series data.Different results with time series data.Policy significance?Policy significance?Structural explanation.Structural explanation.EKC definitionEKC definitionThe EKC hypothesizes that the relation The EKC hypothesizes that the relation between income per capita and emissions between income per capita and emissions has an inverted Uhas an inverted U--shape.shape.At relatively low income levels, emissions At relatively low income levels, emissions increase with income, but after some increase with income, but after some “turning point”, emissions decrease with “turning point”, emissions decrease with income.income.ExampleExampleTypical estimation:Typical estimation:212ln( / ) ln( / ) (ln ( / ))it i t it itEP GDPP GDPPαδβ βε=++ + +Turning point is given by12exp ( )2ββ−.ExampleExampleSOSO22GDP/capitaUSD 6000Empirical evidenceEmpirical evidenceEKC found to hold for some pollutants EKC found to hold for some pollutants ((sulphursulphurdioxide, particles), but others dioxide, particles), but others increase monotonically with income increase monotonically with income (carbon emissions).(carbon emissions).Differences if study OECD countries or Differences if study OECD countries or nonnon--OECD countries. No or higher turning OECD countries. No or higher turning point for the latter for CO2 emissions, for point for the latter for CO2 emissions, for example. (Richmond and Kaufman, 2005)example. (Richmond and Kaufman, 2005)The policy issue?The policy issue?EKCsEKCshave been used as an argument that have been used as an argument that economic growth and increased environmental economic growth and increased environmental quality go hand in hand.quality go hand in hand.They have also been used in support of a doThey have also been used in support of a do--nothing policy.nothing policy.This is not very useful since, if there is a turning This is not very useful since, if there is a turning point, we would like to know what factors explain point, we would like to know what factors explain it before making assessments of whether it before making assessments of whether environmental policy is necessary or not.environmental policy is necessary or not.Criticisms of EKCCriticisms of EKCA reduced form relationship.A reduced form relationship.Policy relevance? Black box.Policy relevance? Black box.The existence of an EKC varies according The existence of an EKC varies according to the pollutant: carbon emissions is one to the pollutant: carbon emissions is one case in point.case in point.Income is exogenous: no feedback from Income is exogenous: no feedback from environmental damage to income level.environmental damage to income level.Econometric issues.Econometric issues.Methodological issuesMethodological issuesThe first EKC studies were done on crossThe first EKC studies were done on cross--section data. Can we infer something section data. Can we infer something about one country’s development based about one country’s development based on an EKC from crosson an EKC from cross--section data?section data?Many functional forms can explain the data Many functional forms can explain the data (quadratic, other polynomials).(quadratic, other polynomials).Methodological issuesMethodological issuesOmitted variable biasOmitted variable biasHave to test for stochastic trends in time Have to test for stochastic trends in time series.series.It is the median income rather than the It is the median income rather than the mean that matters.mean that matters.Structural explanationsStructural explanations1)Consumption and production changes with 1)Consumption and production changes with incomeincome2)Preferences for environmental quality2)Preferences for environmental quality3)Policy/institutions for internalizing 3)Policy/institutions for internalizing externalitiesexternalities4)Pollution abatement technology 4)Pollution abatement technology (increasing returns to scale)(increasing returns to scale)5) Dynamic models of resource stocks or 5) Dynamic models of resource stocks or consumer satiation.consumer satiation.1) Consumption and production 1) Consumption and production changeschangesIf industry structure changes from relatively If industry structure changes from relatively clean agrarian economies to polluting industries clean agrarian economies to polluting industries to tertiary sector, trade and to tertiary sector, trade and delocalisationdelocalisationplays plays some role. In a global perspective, there are some role. In a global perspective, there are limits to this phenomenon.limits to this phenomenon.Scale (GDP), technique (emissions intensity) Scale (GDP), technique (emissions intensity) and composition (output mix) effects.and composition (output mix) effects.The example of CO2 emissions: increased The example of CO2 emissions: increased income changes fuel mix, structure of industry.income changes fuel mix, structure of industry.2) Preferences for environmental 2) Preferences for environmental qualityqualityEvidence of increased demand for Evidence of increased demand for environmental quality with increased environmental quality with increased income (positive income elasticity for income (positive income elasticity for environmental quality).environmental quality).Is environmental quality a normal good or Is environmental quality a normal good or even a luxury good? even a luxury good? KristromKristrom& & RieraRiera(1996): income elasticity less than 1.(1996): income elasticity less than 1.3)