Environmental Kuznets Curves

Introduction

Conventional wisdom might predict that the more a country develops and consumes, the greater its environmental impact. So when the theory of the Environmental Kuznets Curve (EKC), which “postulates an inverted-U-shaped relationship between different pollutants and per capita income, i.e., environmental pressure increases up to a certain level as income goes up; after that, it decreases” (Dinda, 2004), emerged in the early 1990s, it became (and it remains) a topic of much discussion in environmental studies. If proven to exist, EKCs stand to offer important policy insights, particularly that the solution to environmental problems may be to grow out of them. However, scholars continue to debate whether EKCs exist, and if so, in which circumstances they are observed. Further, if EKCs are identified, the debate continues over their implications for policy.

This essay will discuss how the hypothesis of the “Environmental Kuznets Curve” might potentially lead to inappropriate environmental policy prescriptions. First, I will examine different instances when EKCs have and have not been observed, including in the case of environmental impact composite statistics called Environmental Space and Ecological Footprint (EF). Second, I consider the pollution haven hypothesis (PHH) and what distorting effect it might have when considering both national and global EKCs. Third, I look at population and its effect on the inflection point at which falling pollution is observed as an economy develops. Fourth, I examine opportunities for developing countries to tunnel through EKCs and how assuming EKCs exist could lead to suboptimal policy. Fifth, I discuss an on-going debate in the academic literature on whether EKCs exist when other variables are taken into account. For each of the above cases, I discuss implications for inappropriate environmental policy prescriptions. Finally, I conclude that, since EKCs have only been observed for certain pollutants in certain contexts and that their very existence is debated, the potential for inappropriate environmental policy prescriptions is great. Thus, the application of EKCs’ as justification for environmental policy should be limited.

EKCs observed 

Since EKCs were first hypothesized in the early 1990s, environmental researchers have looked for evidence to support the theory. As defined in the introduction above, the theory does not stipulate to which types of environmental issues it applies; however, empirical support for the hypothesis has not been universal across various types of environmental degradation. For example, Dinda (2004) only finds evidence to support the EKC hypothesis for local air pollutants. Moreover, Rothman (1998) shows that, for pollutants whose costs firms can easily externalize, an EKC relationship between economic development and falling pollution cannot be established. In addition, Spangenberg (2001) and Caviglia-Harris, Chambers, & Kahn (2009) introduce composite measures of environmental impact—Environmental Space and Ecological Footprint (EF), respectively—into the EKC discussion, arguing that using one or a small group of pollutants as a proxy for environmental degradation is a methodological flaw. In both cases, the authors did not find an observable EKC-style relationship when using their more comprehensive composite environmental measurements, suggesting that the net effect of environmental degradation for one factor might be cancelled out when taking a broader view of the relationship between economic development and environmental degradation. Given these findings, applying the EKC hypothesis to pollutants that firms can easily externalize or on an economy-wide level can lead to inappropriate environmental policy prescriptions.

The Pollution Haven Hypothesis (PHH)

An important cousin of the EKC hypothesis is the Pollution Haven Hypothesis (PHH), which postulates that the reason environmental degradation eventually decreases as per capita income increases is that, as an economy develops, increasingly stringent environmental regulations push dirty production processes offshore rather than actually changing the processes themselves. The dirty goods are then imported back into the developed country. The net effect in country is a reduction in environmental degradation, but the environmental damage is still occurring offshore (see Cole, 2004). Cole (ibid.) and Nahman & Antrobus (2005) examine evidence for the PHH, although they find weak and mixed support, respectively. However, the PHH offers an important insight into policy prescriptions for EKCs: if a pollution haven can be observed for a particular form of degradation, then policies encouraging the offshoring of the degradation simply result in a national EKC and are of questionable value when taking a global perspective of environmental systems.

Population effects

Another potential lurking variable when examining EKCs is the interaction between population growth and the size and shape of the EKC. If the population continues to grow as an economy develops, a projected EKC could become distorted. Zhe & Fu (n.d.) find in simulations that ‘positive population growth raises the height of the EKC at every level of output per worker; thus, putting an extra burden on environment quality’ and further that ‘[e]mpirical evidence from China partially supports the results’. In other words, Zhe and Fu find that a higher per capita income is required before the EKC reaches the inflection point where environmental degradation decreases with increased development, meaning the area under the EKC is greater and more environmental damage is the result. In addition, Thompson (2013) models population into EKCs for water using two methods and finds ‘EKCs for both models but with very different turning points. The turning point in the two stage model is nearly twice as large as the turning point in the per capita model’. Thus, Thompson finds that changing the way in which population is factored into the EKC can change the height of the EKC by 100%. Both the Zhe and Fu study and the Thompson study have important policy implications. If demographers forecast continuing population growth throughout the economic development process, traditional EKC projections may inaccurately estimate the amount of environmental degradation likely to occur from a set amount of economic development, and depending on the method used in projecting the EKC, population effects could significantly change inflection points. Thus, methodologies employing EKCs that fail to account for population effects or that do not maintain consistent methodology for accounting for population throughout their calculations could lead to inappropriate policy prescriptions.  

Tunnelling through the EKC

Academics and policymakers using historical data from the developed world to demonstrate the existence of EKCs might conclude that employing ‘dirty’ development practices, particularly in early stages of economic development, constitutes a typical step on the way to a cleaner economy for any developing nation. Such reasoning is particularly appealing, as it has been proven in practice: the developed world has since moved past many of its dirtiest production methods towards a cleaner economy. Moreover, international development experts might observe that dirty production methods are cheaper in the developed world (where they have benefitted from years of technological and efficiency advancements) and are therefore likely to be cheaper to get off the ground in the developing world. While such conclusions might accomplish short-term development goals, however, they preclude leapfrogging opportunities in developing countries that would enable ‘tunnelling’ through EKCs by implementing cleaner, more efficient technologies and embedding them into budding infrastructure. Munasinghe (1999) proposes such tunnelling may be possible, and Stern (2004) finds it is already occurring in some developing countries. These outcomes suggest policymakers should be cautious not to assume an EKC paradigm is always necessary in economic development and should avoid implementing infrastructure that might be cheapest upfront while ignoring opportunities for significant medium- and long-term financial and environmental savings available by employing cleaner, more-efficient technologies.

Reliability of the EKC paradigm

Building on tunnelling effects discussed in the previous section as well as the discussion from section II above, some scholars suggest the EKC relationship between environmental degradation and economic growth may not meaningfully exist at all as more and more factors are considered. As Nahman & Antrobus (2005) point out, ‘Some argue that the EKC is no more than a methodological artefact’ and that it ‘arises due to the omission of certain important variables, such as the price of energy, the distribution of income, the demand for and supply of environmental quality, or education’. Moreover, Caviglia-Harris et al. (2009) find that ‘energy is largely responsible for the lack of an EKC relationship, and that energy consumption levels would have to be cut by over 50% in order for a statistically significant EKC relationship to emerge’, concluding that ‘[o]verall, these results suggest that growth alone will not lead to sustainable development’. In addition, Stern (2004) claims that ‘EKC results have a very flimsy statistical foundation’ and that new methodologies for evaluating EKCs capable of ‘disentangl[ing] the true relations between development and the environment…may lead to the demise of the classic EKC’. However, Galeotti, Manera, & Lanza (2009), implementing a methodology similar to Stern’s and examining ‘the controversial case of carbon dioxide emissions’ find ‘that more EKCs come back into life’ applying these methodological approaches. Notwithstanding, they ‘confirm that the EKC hypothesis remains a fragile concept’. Thus, in all, even claiming academic consensus on the existence of EKCs remains dubious. Given all this debate, an argument could be made that any use of EKCs in policymaking could lead to inappropriate policy prescriptions. Policymakers might do well to limit the use of EKCs as justification for policy to cases where they are reasonably confident EKCs have been shown to exist and to monitor empirical data and academic discussions for new developments and conclusions on the reliability of the EKC paradigm.

Conclusion

This essay has examined five areas where employing the EKC hypothesis could lead to inappropriate policy prescriptions, producing at least five relevant conclusions for policymaking. First, empirical observations do not support the EKC paradigm as applicable to all forms of environmental degradation. Second, evidence confirming the PHH suggests that the dirty production offshore of formerly domestically produced goods might at least partially offset the benefits of EKCs in developed countries. Third, discrepancies in methods for accounting for population in EKCs can lead to drastically different EKC inflection points. Fourth, expecting that economic development should follow an EKC pattern might preclude opportunities to tunnel through EKCs in developing countries. And fifth, the existence of EKCs is widely contested in the academic literature. In each case, this essay has shown how failing to account for these potential imperfections of the EKC model can result in poor environmental policy prescriptions. In order to avoid such inappropriate policy prescriptions, care must be taken in applying the EKC—and some have argued in applying the EKC hypothesis at all—to economic-development and environmental policy.

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Zhe, G. Z., & Fu, Y. B. (n.d.). Population Growth and the Environmental Kuznets Curve. Retrieved December 04, 2013, from http://www.sfu.ca/~yuf/research/Green technology options and EKC.pdf