Is the Environmental Kuznets Curve Driven by Structural Change? What Extended Time Series May Imply for Developing Countries

Abstract

Until recently, it was thought that the relationship between economic growth and environmental degradation was a monotonic one, even though there was little agreement as to whether economic growth led to environmental degradation or to increasing environmental quality. At the one extreme there are those who argue that economic growth results in ever increasing use of energy and materials and expanding worker productivity and hence more environmental degeneration. At the other extreme are those who claim that the fastest road to environmental improvement is along the path of economic growth; with higher income comes increased demand for improved environmental protection measures. From this perspective, as Beckerman (1992) put it: "the surest way to improve your environment is to get rich" (quoted by Rothman 1998, pp. 178). A number of empirical studies in the early 1990s (Grossman and Krueger 1991, 1994; Shafik and Bandyopadhyay 1992; and Panayotou 1992, 1993, and 1995) found a nonmonotonic, inverted U-relationship between a number of local pollutants such as particulates and sulfur dioxide and income suggesting a changing relationship between environment and growth along the course of economic development (see Figure 1). At an early stage of development the environment deteriorates with economic growth until a certain level of per capita income is reached beyond which further increases in income result in environmental improvements. The changing income-environment relationship in the course of economic development, known as the Environmental Kuznets Curve (EKC) was attributed largely to behavioral factors: as income rises the effective demand for environmental quality (an income-elastic amenity) rises and eventually overwhelms any scale effects of economic growth on pollution. The behavioral explanation of the EKC presumes a perceived impact of pollution on health, quality of life, or welfare more generally; it is the changing valuation of these impacts as income increases that brings about the reversal of the growth-environment relationship. It is, therefore, surprising that empirical studies in the late 1990s (e.g. Schmalensee, Stoker, and Judson 1998 and Panayotou, Sachs, and Peterson 1999) found the same inverted U-relationship between a global pollutant, CO2, and economic growth. CO2 is greenhouse gas, which is not visible or in anyway perceptible, and any impact (global warming) it may have is distant, dispersed, and highly uncertain. It is, therefore, unlikely that behavioral changes (due to perceptible climate change) can explain falling CO2 emissions per capita once a certain level of per capita income is reached. A different explanation is called for.

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