Economic Growth and Environmental degradation nexus in Sri Lanka

Abstract

The environmental Kuznet curve (EKC) hypothesis suggests that at the initial stage of development, as the economy grows, environ-mental degradation rises until a turning point is reached whereby the pollution and degradation begins to decline while the economy continues to grow (it follows an inverted U curve). Is the environmental Kuznet curve (EKC) hypothesis applicable to Sri Lanka? What factors are responsible for environmental degradation in Sri Lanka? This study seeks to provide answers to these fundamental questions. Sri Lanka is one of the emerging economies in South Asia with an average annual growth rate of 4.16% in the last five years and the industrial sector contributing 25% of Gross Domestic Product (GDP). This hypothesis is tested for Sri Lanka. This study also investigated the major factors behind environmental pollution and degradation in Sri Lanka. Annual data from 1971-2014 was used in estimating the relationship between economic growth and environmental degradation. Carbon (CO2) emission was used as a proxy for environmental degradation while real per capita income was used as a proxy for growth along with other explanatory variables. An autoregressive distributed lag model was used. Results showed that neither the EKC hypothesis nor the pollution haven hypothesis are applicable to Sri Lanka. Long term estimates revealed that increasing energy consumption leads to increasing CO2 emissions. Secondly, it was observed that energy consumption, urbanization, trade openness, tourism and financial development are among the key factors responsible for the quality of the environment. The policy implication is that the Sri Lankan Government, in conjunction with the private sector must adopt energy saving and environmental friendly technologies and production processes in order to save the environment.