THE ENVIRONMENTAL KUZNETS CURVE- A BRIEF ANALYSIS

ECONOMICS

Faculty Advisor: Ms. Dipakshi Das

Name- Yash Goyal

UID Number– SM0118062

Year II, Semester III.

National Law University, Assam

1th November, 2019

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 TABLE OF CONTENT

1. Introduction……………………………………………………………….3
1.1 Objectives……………………………………………………………..3
1.2 Scope and Limitations…………………………………………….......4
1.3 Review of Literature…………………………………………………..4
1.4 Research Questions…………………………………...……………….5
1.5 Research Methodology………………………………………………...5
2. Theoretical Background of Kuznets Curve…………………………..........6
3. Environmental Kuznets Curve…………………………………………….8
3.1 Policy…………………………………………………....…….………8
3.2 Trade………………………………………………………….……...10
3.3 Least Developed Countries…………………………………...……...11
3.4 Recent Development…………………………………………………12
4. Applicability of Kuznets Curve in Modern World………………………14
5. Critique of EKC…………………………………………...……..………16
5.1 Theoretical…………………………………………………..………..16
5.2 Economic………………………………………………….………….17
6. Conclusion………………………………………………………………..19
7. Bibliography…………………………………………………...…..……..20

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 1. INTRODUCTION

During the 1990s the empirical literature on the link between economic growth and
environmental pollution sought to test the Environmental Kuznets Curve (EKC) hypothesis,
which posits that in the early stages of economic development environmental degradation will
increase until a certain level of income is reached (known as the turning point) and then
environmental improvement will occur. This relationship between per capita income and
pollution is often shown as an inverted U-shaped curve. This curve is named after Kuznets
who hypothesized that economic inequality increases over time and then after a threshold
becomes more equal as per capita income increases. In the early 1990s the EKC was
introduced and popularized with the publication of Grossman and Krueger’s work on the
potential environmental impacts of NAFTA, and the 1992 World Bank Report.

The environmental Kuznets curve is a hypothesized relationship among various indicators of

environmental degradation and income per capita. During the early stages of economic
growth, degradation and pollution increase, but beyond some level of income per capita
(which will vary for different indicators) the trend reverses, so that at high income levels
economic growth leads to environmental improvement. This implies that the environmental
impact indicator is an inverted U-shaped function of income per capita.

This project aims to explain the theoretical and economic framework of the EKC and its
relation with policy, trade and LDCs. It will further focus on some recent developments in the
theory and the criticism of the same.

1.1 LITERATURE REVIEW

1) James Andreoni and Arik Levinson, The simple analytics of the environmental
Kuznets curve, University of Wisconsin, Madison:
The paper presents evidence to suggest that some pollutants follow an inverse-U-
shaped pattern relative countries’incomes, a relationship that has been called an
‘environmental Kuznets curve’. It presents simple and straight-forward static model
of the microfoundations of this relationship, in which the curve depends on increasing
returns in the technological link between consumption of a desired good and
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 abatement of its undesirable by-product. The curve does not depend on the dynamics
of growth, political institutions, or even externalities, and can be consistent with
market failure or efficiency. It concludes by presenting empirical support for
increasing returns to abating some common air pollutants.

2) David I. Stern, The Rise and Fall of the Environmental Kuznets Curve, Rensselaer
Polytechnic Institute, Troy:
This paper presents a critical history of the environmental Kuznets curve (EKC). The
EKC proposes that indicators of environmental degradation first rise, and then fall
with increasing income per capita. Recent evidence shows however, that developing
countries are addressing environmental issues, sometimes adopting developed country
standards with a short time lag and sometimes performing better than some wealthy
countries, and that the EKC results have a very flimsy statistical foundation. A new
generation of decomposition and efficient frontier models can help disentangle the
true relations between development and the environment and may lead to the demise
of the classic EKC.

1.2 OBJECTIVES
• To understand the theoretical and economic framework of the Environmental Kuznets
Curve.
• To bring out the relation between EKC and policy, trade and LDCs.
• To analyse the recent developments in the concept.
• To find out the criticisms of the theory.

1.3 SCOPE AND LIMITATIONS

The scope of the project is limited to the environmental factor of the Kuznets curve.

The main limitation faced was of effects of Kuznet Curve on soil, water and noise pollution.

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 1.4 RESEARCH QUESTIONS

1. What is the theoretical and economic framework of the Environmental Kuznets

Curve?
2. What is the relation betwenn EKC and policy, trade and LDCs?
3. What are the recent developments in the theory?
4. What are the criticisms of the theory?

1.5 RESEARCH METHODOLOGY

The methodology adopted for the purpose of the present research is the doctrinal and the
analytical methods. Secondary sources have been used for reviewing the existing literature
and for the collection of data.

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 2. THEORETICAL BACKGROUND OF KUZNETS CURVE

The EKC concept emerged during the early 1990s with Grossman and Krueger’s path-
breaking study of the potential impacts of the North American Free Trade Agreement
(NAFTA) and
Shafik and Bandyopadhyay’s background study for the World Development Report 1992.
However, the idea that economic growth is necessary for environmental quality to be
maintained or improved is an essential part of the sustainable development argument
promulgated by the World Commission on Environment and Development in Our Common
Future. The EKC theme was popularized by the International Bank for Reconstruction and
Development’s (IBRD) World Development Report 1992, which argued that ‘‘the view that
greater economic activity inevitably hurts the environment is based on static assumptions
about technology, tastes, and environmental investments’’ and that ‘‘as incomes rise, the
demand for improvements in environmental quality will increase, as will the resources
available for investment.’’1 Others have expounded this position even more forcefully, with
Beckerman claiming that ‘‘there is clear evidence that, although economic growth usually
leads to environmental degradation in the early stages of the process, in the end the best and
probably the only way to attain a decent environment in most countries is to become rich”.2
However, the EKC has never been shown to apply to all pollutants or environmental impacts,
and recent evidence challenges the notion of the EKC in general. If there were no change in
the structure or technology of the economy, pure growth in the scale of the economy would
result in a proportional growth in pollution and other environmental impacts. This is called
the scale effect. The traditional view that economic development and environmental quality
are conflicting goals reflects the scale effect alone.
Panayotou, a proponent of the EKC hypothesis, argued, “At higher levels of development,
structural change towards information-intensive industries and services, coupled with
increased environmental awareness, enforcement of environmental regulations, better

1 World Development Report 1992: “Development and the Environment”, Oxford University Press, New York.
2
W. Beckerman, “Economic growth and the environment: Whose growth? Whose environment?”, 1992, pp.-
481– 496.

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technology, and higher environmental expenditures, result in levelling off and gradual decline
of environmental degradation”.2
The EKC is explained by the following proximate economic factors that drive changes in
environmental impacts and that may be responsible for rising or declining environmental
degradation over the course of economic development:
a) Scale of production implies expanding production, with the mix of products produced,
the mix of production inputs used, and the state of technology all held constant.
b) Different industries have different pollution intensities, and the output mix typically
changes over the course of economic development.
c) Changes in input mix involve the substitution of less environmentally damaging
inputs to production for more damaging inputs and vice versa.
d) Improvements in the state of technology involve changes in both (i) production
efficiency in terms of using less, ceteris paribus, of the polluting inputs per unit of
output and (ii) emissions-specific changes in process that result in less pollutant being
emitted per unit of input.
These proximate variables may, in turn, be driven by changes in underlying variables such as
environmental regulation, awareness, and education. The various studies made till date give
different simplifying assumptions about the economy. Most of these studies can generate an
inverted U-shape curve of pollution intensity, but there is no inevitability about this. The
result depends on the assumptions made and the value of particular parameters. It seems
fairly easy to develop models that generate EKCs under appropriate assumptions, but none of
these theoretical models have been empirically tested. Furthermore, if in fact the EKC for
emissions is monotonic as recent evidence suggests, the ability of a model to produce an
inverted Ushaped curve is not necessarily a desirable property.

2 T. Panayotou, “Demystifying the environmental Kuznets curve: Turning a black box into a policy tool”, 1997,
Environmental Development Economics, pp.-465–484.

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 3. ENVIRONMENTAL KUZNETS CURVE

3.1 POLICY

The reduced-form econometric models that have commonly been used in EKC studies do not
test the pro-growth hypotheses or even investigate how changes in income influence
environmental outcomes.3 However other studies have analyzed the factors that influence
environmental change on a more disaggregate level. Selden, Forrest and Lockhart analyzed
scale, composition and technique effects at the sector level to decompose changes in various
US emissions.4 Scale is indicated through the growth of emissions when the ratio of
emissions to GDP remains constant. Composition effects are changes in emissions due to
differential growth rates among sectors within an economy, and technique effects are all other
changes in emissions per unit of output at the sectoral level, including energy efficiency,
energy mix, and other technique effects. They found that increased economic growth will
trigger a composition shift of economic activity away from heavy manufacturing to services,
and that economic growth may also generate environmental benefits through the development
and adoption of new technology, i.e. cleaner production and improved energy efficiency.
Therefore the policy prescription for alleviating at least some environmental problems may
equal more economic growth, but their finding that emissions abatement technology played a
significant role in bringing about improvement in environmental quality points towards a
policy-induced response.

They also find that global energy prices may signal emissions downturns because price
incentives most likely provide incentives for increased energy efficiency. Therefore the
question remains if emissions will rise again as international energy prices fall from their
peaks or if policy is not introduced. The empirical literature has also examined a range of
factors that may influence environmental quality, such as democracy, literacy, income
inequality and ENGOs. Using the panel data with which Grossman and Krueger 5 established
3 G.M Grossman and A.B Krueger, “Environmental impacts of a North American Free Trade Agreement”,
1994, MIT Press, Cambridge, MA.
4 T.M Selden and D. Song, “Environmental quality and development: Is there a Kuznets curve for air
pollution?”, 1994, J. Environ. Econ. Environ. Mgmt. 27, pp.-147–162.
5 G.M Grossman and A.B. Krueger, “Economic Growth and the Environment”, 1995, Quarterly Journal of
Economics, 110(2): pp.-353-377.

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the EKC, Torras and Boyce6 define higher political and civil liberties and increased literacy
rate as constituting a more equitable power distribution. They found that a more equitable
power distribution tends to result in better environmental quality and that literacy and rights
appear to be strong predictors of pollution levels in low income countries. Therefore the
policy implications may be to not put a brake on economic growth in LDCs, but to focus on
interventions that may lead to a more equitable power distribution, such as increased literacy
and rights. Barrett and Graddy using the same data find that for air and water pollution, an
increase in civil and political freedoms significantly improves environmental quality 7. They
found, especially with SO2, that a low freedom country with an income level near the peak of
the EKC can reduce its pollution at least as much by increasing freedoms as it can by
increasing income per capita. This has policy relevance, the authors argue, in that political
freedoms should be treated independently from incomes. In contrast, Neumayer shows that
democracies exhibit stronger international environmental commitment than non-democracies,
but he finds that there is weak evidence for a link between democracy and environmental
outcomes.8 This raises questions about how we manage long term or global pollutants –
democracies may not address these environmental quality issues; therefore perhaps other
deliberative processes are needed.

Binder and Neumayer found that environmental non-government organization (ENGO)

strength is associated with lower air pollution levels even after controlling for variation in
income, democracy, business lobby strength, literacy and income inequality.9 Thus, they
highlight that ENGOs are important drivers of policy-induced responses. Furthermore,
Neumayer found that countries with left-wing governments improve environmental quality
more than right-wing governments, whereas the effect of a corporatist governance of the
economy is largely ambiguous.10 Cole reports that more corrupt countries have a worse
environmental record than countries with less corruption. 11 Thus there are a myriad of factors
that may influence increased demand for environmental regulation as incomes rise.
6 M. Torras and J.K. Boyce, “Income, inequality, and pollution: a reassessment of the environmental Kuznet
Curve”, 1998, Ecological Economics, pp-147-160.
7 S.Barrett and K. Graddy, “Freedom, growth and the environment”, 2002, Environment and Development
Economics, pp.-433-456.
8 E. Neumayer, “Do Democracies Exhibit Stronger International Environmental Commitment? A Cross-
Country Analysis”, 2002, Journal of Peace Research, pp.-139-164.
9 S.Binder and E. Neumayer, “Environmental pressure group strength and air pollution: An empirical analysis”,
2005, Ecological Economics, pp.-527-538.
10 E. Neumayer, “Do Democracies Exhibit Stronger International Environmental Commitment? A Cross-
Country Analysis”, 2002, Journal of Peace Research, pp.-139-164.
11 A.M Cole, “Corruption, Income and the Environment: An Empirical Analysis”, 2007, Ecological Economics,
pp.-637-647.

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 3.2 TRADE

EKC provides empirical evidence to test the trade, economic growth and environment
hypothesis. The debate is typically divided between the so-called optimists and pessimists
who believe that trade as a driver of economic growth is either good or bad for the
environment. Studies have found that the EKC inverted-U relationship may be a result of the
changing scale, composition and technique patterns that appear to accompany liberalized
trade and economic growth. However these structural changes from heavy industry towards
services in the rich countries may be a result of the South’s specialization in the extraction of
natural resources and the production of labour and pollution intensive goods.12 The fact that
developed countries may now be importing their pollution-intensive output from the
developing world may therefore explain the reductions in local air pollution experienced in
most developed countries in recent years.13 The pollution haven hypothesis is one attempt to
explain these changes in trade patterns. It claims that less stringent regulation in developing
countries will provide them with a comparative advantage in the production of pollution-
intensive goods over developed countries. Therefore the North will specialize in clean
production whereas the South in pollution-intensive production. However the data is mixed.
Some find no evidence suggesting that the stringency of a country’s environmental regulation
significantly impacts competitiveness of pollution-intensive firms whereas others have found
some evidence of pollution haven pressures.
Cole examined North-South trade flows for pollution intensive products, and found evidence
of pollution haven effects, but did not find they were widespread. 14 In fact, he found that
pollution haven effects may be small compared to other EKC explanatory variables such as
increased demand for environmental regulations, increased investment in abatement
technologies, trade openness, structural change away from manufacturing, and increased
imports of pollution intensive outputs. Indeed, there is some evidence that trade openness
may have beneficial effects on the environment. Neumayer reports evidence suggesting that
countries more open to foreign trade have a higher likelihood to ratify multilateral

12 D.I Stern, “Progress on the Environmental Kuznets Curve?”, 1998, Environment and Development
Economics, 3(2): pp.-173-196.
13 A.M Cole, E. Neumayer, “Environmental policy and the environmental Kuznets curve: can developing
countries escape the detrimental consequences of economic growth?”, 2005
14 M.A. Cole, “Trade, the pollution haven hypothesis and the environmental Kuznets curve: examining the
linkages”,2004, Ecological Economics, 48: pp.-71-81.

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environmental agreements.15 He examined the claim that outward orientation helps countries
to reduce their pollution intensity that is the amount of pollution generated per unit of GDP.
They found that countries, which import a larger share of their machinery and manufactured
goods from countries with lower pollution intensity, manage to lower their CO2 and SO2
pollution intensity faster than others. However the question remains whether or not LDCs
will be able to follow the pollution-income paths of developed countries

3.3 LEAST DEVELOPED COUNTRIES

One of the key issues that the EKC has raised is whether the same pattern of growth versus
environmental impact can be replicated by the now poor countries in the future. Cole and
Neumayer examined the implications of the EKC for pollution trends in LDCs. They first
reviewed the robustness of the EKC critique, suggesting that the EKC may be more robust than
some studies have claimed. Then, they explored whether LDCs are likely to follow the
compositional changes that developed countries have followed. They demonstrated evidence that
the emissions reductions in now rich countries are in part due to export of pollution-intensive
domestic production to LDCs, thus suggesting that current poor countries will not be able to
replicate this experience.16 They then examined how long it will take different regions in the
developing world to reach EKC turning points according to three economic growth projections
and the most widely cited EKC studies. They demonstrate some unsettling conclusions that
environmental quality is predicted to get worse for many years to come, even under high
economic growth scenarios.
There are different viewpoints regarding the EKC relationship. First is the view that pollution
rises to a horizontal line of maximum emissions as globalization forces a “race to the bottom” in
environmental standards. Secondly, in a similar pessimistic outlook, some believe that
environmental impacts will continue to increase as new toxics like CO2 emissions and
carcinogens, replace traditional pollutants that may have exhibited an inverted U-shape curve.
Third is the conventional EKC, and fourth is the “revised EKC” where pollution begins falling at
lower income levels.
Furthermore, there are reasons why moving up the first part of the EKC curve could lead to very
unpleasant implications for LDCs. What if a poor country stalls right at the moment of
demographic transition? What if environmental thresholds or irreversible environmental

15 E. Neumayer, “Does trade openness promote multilateral environmental cooperation?”,2002, World

Economy, 25(6): pp.-815-832.
16 M.A. Cole and E. Neumayer, “Environmental policy and the environmental Kuznets curve: can developing
countries escape the detrimental consequences of economic growth?”, 2005.

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degradation occurs?17 He cautions that there are no guarantees that the external and internal
conditions of low income countries are now the same as those conditions of high income
countries were at the time of their development.

3.4 RECENT DEVELOPMENT

Significant developments, have been made in the study of EKC. They are as follows:
(a) Empirical case study evidence on environmental performance and policy in developing
countries;
(b) Improved econometric testing and estimates;
(c) A new wave in the investigation of environment-development relations using
decomposition analysis and efficient frontier methods.
The diagram below shows alternative viewpoints developed regarding the nature of the
emissions and income relation.

Two viewpoints argue that the EKC is monotonic. The “new toxics’’ scenario claims that
while some traditional pollutants might have an inverted U-shape curve, the new pollutants
that are replacing them do not. These include carcinogenic chemicals, carbon dioxide, etc. As
the older pollutants are cleaned up, new ones emerge, so that overall environmental impact is
not reduced. The ‘‘race to the bottom’’ scenario posits that emissions were reduced in

17 E. Neumayer, “Do Democracies Exhibit Stronger International Environmental Commitment? A Cross-

Country Analysis”, 2002, Journal of Peace Research, 39(2): pp.-139-164.

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developed countries by outsourcing dirty production to developing countries. These countries
will find it harder to reduce emissions. But the pressure of globalization may also preclude
further tightening of environmental regulation in developed countries and may even result in
its loosening in the name of competitiveness. The revised EKC scenario does not reject the
inverted U-shape curve but suggests that it is shifting downward and to the left over time due
to technological change. But this argument is already present in the 1992 World Development
Report (IBRD, 1992).
According to recent economists regulation of pollution and enforcement increase with income
but the greatest increases happen from low to middle income levels and increased regulation
is expected to have diminishing returns.18 There is also informal or decentralized regulation in
developing countries––Coasian bargaining. Further, liberalization of developing economies
over the last two decades has encouraged more efficient use of inputs and less subsidization
of environmentally damaging activities globalization is in fact good for the environment. The
evidence seems to contradict the ‘‘race to the bottom’’ scenario. Multinational companies
respond to investor and consumer pressure in their home countries and raise standards in the
countries in which they invest. Further, better methods of regulating pollution such as market
instruments are having an impact even in developing countries. Better information on
pollution is available, encouraging government to regulate and empowering local
communities. Those that argue that there is no regulatory capacity in developing countries
seem to be wrong. It is found that China is adopting European Union standards for pollution
emissions from cars with an approximately 8–10-year lag.19

18 S. Dasgupta, B. Laplante, H. Wang and D. Wheeler, “Confronting the environmental Kuznets curve. Journal
of Economic Perspectives”, 2002, pp.- 147–168.
19 K.S. Gallagher, “Development of cleaner vehicle technology? Foreign direct investment and technology
transfer from the United States to China”, 2003.

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 4. APPLICABILITY OF KUZNETS CURVE IN INDIA

Air pollution in India is a serious issue with the major sources being fuelwood and biomass
burning, fuel adulteration, vehicle emission and traffic congestion. Air pollution is also the
main cause of the Asian brown cloud, which is causing the monsoon to be delayed. India is
the world's largest consumer of fuelwood, agricultural waste and biomass for energy
purposes. Traditional fuel dominates domestic energy use in rural India and accounts for
about 90% of the total. In urban areas, this traditional fuel constitutes about 24% of the total.
Over 500 million tons of crop residue is burnt in open, releasing smoke, soot, NOx, SOx,
PAHs and particulate matter into the air. This burning has been found to be a leading cause of
smog and haze problems through the winter over Punjab, cities such as Delhi, and major
population centres along the rivers through West Bengal. This problem can be extended to
Kuznets curve analysis as India is a developing economy the air pollution will increase till a
point. But presently, India is among the BRICS nation where they are in a position to bring in
new and cleaner technologies like modern incinerators to reduce air pollution.

Secondly, there is a large gap between generation and treatment of domestic waste water in
India. The problem is not only that India lacks sufficient treatment capacity but also that the
sewage treatment plants that exist do not operate and are not maintained. The majority of the
government-owned sewage treatment plants remain closed most of the time due to improper
design or poor maintenance or lack of reliable electricity supply to operate the plants,
together with absentee employees and poor management. This can again be explained
through the curve analysis. The planning and bringing in newer and environment friendly
sewage cleaning system, water purifies is on process. In future, we may see reduction in
pollution.

Trash and garbage is a common sight in urban and rural areas of India. It is a major source of
pollution. Indian cities alone generate more than 100 million tons of solid waste a year. Street
corners are piled with trash. Public places and sidewalks are despoiled with filth and litter,
rivers and canals act as garbage dumps. In part, India's garbage crisis is from rising
consumption. But, as India is becoming a more stable economy since 2011, several Indian
cities embarked on waste-to-energy projects of the type in use in Germany, Switzerland and
Japan.

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For example, New Delhi is implementing two incinerator projects aimed at turning the city’s
trash problem into electricity resource. These plants are being welcomed for addressing the
city’s chronic problems of excess untreated waste and a shortage of electric power. They are
also being welcomed by those who seek to prevent water pollution, hygiene problems, and
eliminate rotting trash that produces potent greenhouse gas methane. The projects are being
opposed by waste collection workers and local unions who fear changing technology may
deprive them of their livelihood and way of life

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 5. CRITIQUE OF EKC

5.1 THEORETICAL

The key criticism of EKC model, as presented in the World Development Report 1992 was
that it assumes that there is no feedback from environmental damage to economic production
given that income is assumed to be an exogenous variable. The assumption is that
environmental damage does not reduce economic activity sufficiently to stop the growth
process and that any irreversibility is not severe enough to reduce the level of income in the
future. In other words, there is an assumption that the economy is sustainable. However, if
higher levels of economic activity are not sustainable, attempting to grow fast during the
early stages of development, when environmental degradation is rising, may prove to be
counterproductive. It is clear that the levels of many pollutants per unit of output in specific
processes have declined in developed countries over time with technological innovations and
increasingly stringent environmental regulations. However, the mix of effluent has shifted
from sulfur and nitrogen oxides to carbon dioxide and solid waste, so that aggregate waste is
still high and per capita waste might not have declined.20
The Hecksher–Ohlin trade theory, the central theory of trade in modern economics, suggests
that, under free trade, developing countries would specialize in the production of goods that
are intensive in the production inputs they are endowed with in relative abundance: labour
and natural resources. The developed countries would specialize in human capital and
manufactured capital-intensive activities. Part of the reductions in environmental degradation
levels in developed countries and part of the increases in environmental degradation levels in
middle-income countries may reflect this specialization. Environmental regulation in
developed countries might further encourage polluting activities to gravitate toward
developing countries. These effects would exaggerate any apparent decline in pollution
intensity with rising income along the EKC.
In our finite world, the poor countries of today would be unable to find other countries from
which to import resource-intensive products as they themselves become wealthy. When the
poorer countries apply similar levels of environmental regulation, they would face the more

20 D.I Stern, “Explaining changes in global sulfur emissions: An econometric decomposition approach”, 2002,
pp.- 201–220.

16
difficult task of abating these activities rather than outsourcing them to other countries. 21
There are no clear solutions to the impact of trade on pollution from the empirical EKC
literature.
Some early EKC studies showed that a number of indicators—SO2 emissions, NOx, and
deforestation— peak at income levels around the current world mean per capita income..
However, income is not normally distributed but rather very skewed, with much larger
numbers of people below mean income per capita than above it. Therefore, it is median
income, rather than mean income, that is the relevant variable.

5.2 ECONOMIC

Econometric criticisms of the EKC concern four main issues22:

a) heteroskedasticity
b) simultaneity
c) omitted variables bias
d) cointegration issues.
Heteroskedasticity may be important in the context of cross-sectional regressions of grouped
data. Data for a country are a sum or mean of observations for all of the regions, firms, or
households within that country. Smaller residuals may be associated with countries with
higher total GDPs and populations. Taking heteroskedasticity into account in the estimation
stage seems to significantly improve the goodness of fit of globally aggregated fitted
emissions to actual emissions.
Simultaneity may arise because increasing energy use drives increasing income, but
increasing income may also increase the demand for energy in consumption activities. In
addition, if environmental degradation is sufficiently severe, it may reduce national income,
whereas the scale effect implies that increased income causes increased environmental
degradation. A Hausman-type statistical test for regressor exogeneity can be used to directly
address the simultaneity issue. No evidence of simultaneity has been found using such a test.
In any case, simultaneity bias is less serious in models involving integrated variables than in
the traditional stationary econometric model.
The Granger causality test can be used to test the direction of causality between two
variables. In tests of causality between CO2 emissions and income in various individual
21 J.A List and C.A Gallet, “The environmental Kuznets curve: Does one size fit all?”, 1999, pp.-409–424.

22 D.I. Stern, “Environmental Kuznets Curve”, Rensselaer Polytechnic Institute Troy, New York, United States.

17
countries and regions, the overall pattern that emerges is that causality runs from income to
emissions or that there is no significant relationship in developing countries, whereas
causality runs from emissions to income in developed countries. However, in each case, the
relationship is positive, so that there is no EKC-type effect. Three lines of evidence suggest
that the EKC is an incomplete model and that estimates of the EKC in levels can suffer from
significant omitted variables bias:
(1) differences between the parameters of the random effects and fixed effects models tested
using the Hausman test,
(2) differences between the estimated coefficients in different subsamples, and
(3) tests for serial correlation.
Results for cointegration are less clear-cut than those for integration in the individual time
series. For sulphur emissions in 74 countries from 1960 to 1990, approximately half of the
individual country EKC regressions cointegrate, but many of these have parameters with
incorrect signs. Some panel cointegration tests indicate cointegration in all countries, and
some accept the non-cointegration hypothesis. But even when cointegration is found, the
forms of the EKC relationship vary radically across countries, with many countries having U-
shaped EKCs. A common cointegrating vector in all countries is strongly rejected.

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 6. CONCLUSION

It has been established that the inverted U-shaped relationship between income and
environmental degradation are complex and perhaps context specific, but recent
improvements in empirical methods address a number of past criticisms, which adds
robustness to the EKC results for certain environmental pollutants. Countries have managed
to reduce their pollution load, which can suggest alternative explanations of the income-
pollution relationship through variables such as energy price shocks, democracy, literacy,
income inequality and ENGOs. It can be inferred that increased demand for environmental
regulation may not be a quasiautomatic response with economic growth. Structural shift away
from manufacturing may also explain the EKC relationship.

Questions were raised with serious ramifications for LDCs. Should today’s developing
countries follow the “grow now, clean up later” logic that has characterized the development
paths of today’s rich countries? Given predictions that some LDCs will not reach EKC
turning points for decades to come, it is even more imperative that economic growth and
liberalization should not be thought of as a solution for environmental problems. Therefore it
might not be optimal, particularly for LDCs, to follow an EKC pathway for a variety of
reasons, including: the likelihood of high environmental damage costs; the high cost of
raising environmental quality after the damage has occurred; the potential of reaching
environmental thresholds and causing irreversible environmental damage; and the potential
damage to human health and economic productivity. A precautionary approach suggests that
in order to decouple economic value from environmental degradation policy responses are
needed from the earliest stages of economic development. Thus, alternative socio-economic
factors that would induce increased demand for environmental regulations should be given
incentives along with measures to spur economic growth.

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 7. BIBLIOGRAPHY
• D.I Stern, “Explaining changes in global sulfur emissions: An econometric
decomposition approach”, 2002, pp.- 201–220.

• J.A List and C.A Gallet, “The environmental Kuznets curve: Does one size fit all?”,
1999, pp.-409–424

• S. Dasgupta, B. Laplante, H. Wang and D. Wheeler, “Confronting the environmental

Kuznets curve. Journal of Economic Perspectives”, 2002, pp.- 147–168.
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