Environmental Kuznets Curves: An Update

 

Executive Summary

Since 1991, when economists first reported a systematic relationship between income changes and environmental quality, the Environmental Kuznets Curve (EKC) has become standard fare in technical conversations about environmental policy (Grossman and Krueger 1991). EKCs are statistical artifacts that summarize a few important aspects of collective human behavior in two-dimensional space. A chart showing an Environmental Kuznets Curve reveals how a specific measurement of environmental quality changes as the income of a nation or other large human community changes.

When first unveiled, EKCs revealed a surprising outcome. Some important indicators of environmental quality such as the concentrations of sulfur dioxide and particulates in the air actually improved as incomes and levels of consumption went up. This happy outcome occurred when incomes were higher. Before that point, however, at lower income levels, environmental quality deteriorated as incomes began to rise.

These results quickly generated extensive scholarship. To the authors’ knowledge, there have been over 100 peer-reviewed EKC publications since Grossman and Krueger’s path-breaking work. A review and synthesis of the methods used and the findings of all these studies is beyond the scope of this study. Our major focus is to review the main findings and methodologies of studies that have made significant contributions to the EKC literature. This study updates and extends the earlier PERC study, The Environmental Kuznets Curve: A Primer, by Bruce Yandle, Maya Vijayaraghavan, and Madhusudan Bhattarai (PERC Research Study 02-1, March 2002).

Our review reveals that while there is no single relationship that fits all pollutants for all places and times, in many cases the inverted-U EKC best approximates the link between environmental change and income growth. Furthermore, the acceptance of the EKC hypothesis for select pollutants has important policy implications. Specifically, over time, policies that stimulate growth (trade liberalization, economic restructuring, and price reform) should be good for the environment.

But there is more to the story than rising income. Improvement of the environment depends on government policies, social institutions, and the completeness and functioning of markets. Because market forces will ultimately determine the price of environmental quality, policies that allow market forces to operate are expected to be unambiguously positive. The search for meaningful environmental protection is a search for ways to enhance property rights and markets.

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