Environmental Kuznets Curve Hypothesis: A Survey

Abstract

The Environmental Kuznets Curve (EKC) hypothesis 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. An EKC actually reveals how a technically specified measurement of environmental quality changes as the fortunes of a country change. A sizeable literature on EKC has grown in recent period. The common point of all the studies is the assertion that the environmental quality deteriorates at the early stages of economic development/growth and subsequently improves at the later stages. In other words, environmental pressure increases faster than income at early stages of development and slows down relative to GDP growth at higher income levels. This paper reviews some theoretical developments and empirical studies dealing with EKC phenomenon. Possible explanations for this EKC are seen in (i) the progress of economic development, from clean agrarian economy to polluting industrial economy to clean service economy; (ii) tendency of people with higher income having higher preference for environmental quality, etc. Evidence of the existence of the EKC has been questioned from several corners. Only some air quality indicators, especially local pollutants, show the evidence of an EKC. However, an EKC is empirically observed, till there is no agreement in the literature on the income level at which environmental degradation starts declining. This paper provides an overview of the EKC literature, background history, conceptual insights, policy and the conceptual and methodological critique.

Introduction

Worldwide deterioration of environmental quality has made many feel concerned about the issue and mounting public concern over environmental issues has sparked efforts to understand more clearly the reasons for environmental degradation. The environmental effects of economic growth have been receiving increasing attention of economists in recent years. One particular aspect, the linkage of environment with economic growth/development, evoked much discussion in the last decade (i.e., 1990s) and a sizeable literature on the pollution–income growth relationship has grown in recent period. The common point of all the studies is the assertion that environmental quality deteriorates in early stage of economic development/growth and improves in later stage as an economy develops. In other words, environmental pressure increases faster than income in the early stage of development and slows down relative to GDP growth in higher income levels. This systematic relationship between income change and environmental quality has been called the Environmental Kuznets Curve (EKC). The inverted-U relationship derives its name from the work of Kuznets (1955) who postulated a similar relationship between income inequality and economic development. The logic of EKC relation is intuitively appealing. In the first stage of industrialization, pollution grows rapidly because high priority is given to increase material output, and people are more interested in jobs and income than clean air and water (Dasgupta et al., 2002). The rapid growth inevitably results in greater use of natural resources and emission of pollutants, which in turn put more pressure on environment. People are too poor to pay for abatement, and/or disregard environmental consequences of growth. In later stage of industrialization, as income rises, people value the environment more, regulatory institutions become more effective and pollution level declines. Thus, EKC hypothesis posits a well-defined relationship between level of economic activity and environmental pressure (defined as the level of concentration of pollution or flow of emissions, depletion of resources, etc.). An Environmental Kuznets Curve reveals how a technically specified measurement of environmental quality changes as the fortunes of a country or a large human community change. In brief, Environmental Kuznets Curves are statistical artifacts that summarize a few important aspects of collective human behaviour in two-dimensional space. The EKC hypothesizes an inverted-U-shaped curve when pollution indicators are plotted against income per capita.

The EKC results have shown that economic growth could be compatible with environmental improvement if appropriate policies are taken. It is a significant condition that only when income grows, the effective environmental policies can be implemented.¹ Clearly, before adopting a policy, it is important to understand the nature and causal relationship between economic growth and environmental quality (Coondoo and Dinda, 2002). Therefore the relevant question is: Can economic growth be part of the solution rather than the cause of environmental problem? This has been the primary motivation for empirical studies on EKC searching for evidence of link between income and environmental degradation. It has provoked a vast empirical research over the last decade (i.e., 1990s). The 1990s have seen the advent of EKC hypothesis and an explosion of studies that tested it for several pollutants. The aim of the present paper is not to go further on these issues, but to visualize the current state of knowledge about the EKC. Stern (1998), Ekins (1997), de Bruyn and Heintz (1998) and Stagl (1999) provide good overviews and comparisons. This EKC-Review is slightly different from earlier reviews and here the literature added since then is taken into consideration.

The second section of this paper provides the background history of the environment–economic growth debate and genesis of the EKC; the third section provides a general idea and some conceptual insights and the fourth section deals with theoretical reviews. Empirical evidences have been reviewed in the fifth section, policy implication in the sixth section, and a conceptual and methodological critique has been presented in the seventh section. Finally, the paper concludes with some remarks for direction of future research.