A recursive dynamic CGE approach to investigate environmental Kuznets curve

Abstract

The inverted U-shaped relationship between economic growth and environmental degradation is known as environmental Kuznets curve (EKC) and has been tested in many empirical studies since more than 3 decades. Technological change is one of the tools that can be used to examine the existence of EKC in CGE models. The objective is to extract EKC for G7 countries using a multi-regional CGE model and investigate the effects of some key factors affecting EKC using historical data for the period of 1861–2021. First, we have considered the effects of energy efficiency, on CO2 emissions, on carbon intensity and on economic growth. Then, EKC was extracted based on the obtained results. In addition, the effects of factors such as carbon tax, revenue recycling schemes and various types of substitution elasticities are evaluated on EKC. Our results show that, with a 3% improvement in productivity, by 2050, GDP will increase by nearly 12% and carbon emissions will decrease by 4.4%. The combination of such two effects has led to an inverted U-shaped relationship between economic growth and carbon emissions. Among the elasticity of substitutions, the elasticity of substitution of capital and energy, as well as the substitution elasticity of energy inputs has the greatest effect on EKC. The slope of EKC becomes negative if a carbon tax is imposed. The EKC moves downwards if carbon tax income is transferred to the production tax-cut in renewable sectors. The results suggest that carbon tax and its allocation to renewable sectors will improve environmental effects.