The environmental Kuznets curve reconsidered

Abstract

The environmental Kuznets curve (EKC) hypothesis, whereby pollution first increases then decreases as income increases along an inverted U-shaped path, has generated a large literature beginning in the 1990s. The current analysis contributes to that literature in two main ways, one theoretical and one empirical. First, the theoretical inquiry begins with the idea that a variety of societal parameters may significantly impact the trajectory of environmental quality. We show that changes to production and consumption elasticity can be used to identify the environmental impact of changes to any of these parameters. Special attention is devoted to the cases of income and population growth as each is widely recognized as commanding significant influence over environmental quality. We find that for a wide class of constant elasticity of substitution (CES) models (where production technology and consumer preferences are both in a CES form) both income and population growth lead to degradation of environmental quality along an inverted U-shaped path. This common feature is due to the fact that both income and population have the same relative impact (in their unbounded limits) on production and consumption elasticity. Second, a large new dataset for 1789 sites over 38 years is assembled making it possible to overcome data shortcomings in earlier studies. When integrating the theoretical insights for population change into the empirical model formulation, our results find robust inverted U-shaped relationships for air pollutants with rising incomes and rising population density. These findings provide some added perspective on the claims and implications for the EKC literature and expectations about the possible decoupling of economic growth and environmental damages.