Environmental Kuznets Curve Essay

The threat of global warming has never before been so real, as is being felt now. With the Inter-governmental Panel for Climate Change giving out dire warnings of climate change and pollution in the environment, there has come about a sizeable literature to understand the phenomenon and to cope with it. There has been an increase in concern worldwide as to the deterioration of environmental quality and its impact on human lives. In particular in the field of economics, there have been pertinent questions raised in order to understand the linkage between environmental pressure and economic activity. In what way does environmetal quality affect economic activity? And how does economic development lead to environmental degradation?

Against this backdrop, many theories have been put forth to understand the economics of the environment. One such pathbreaking theory is the Environmental Kuznets Curve, which traces the link in the pollution - income growth relationship. It posits an inverted-U shaped curve between various indicators of environmental degradation and income per-capita. [ Stern, D. (2004). The Rise and Fall of the Environmental Kuznets Curve. World Development Vol. 32, No. 8, pp. 1419–1439, 200. www.elsevier.com/locate/worlddev

] The idea emerged during the 1990s with Grossman and Kruger, who carried out empirical studies as they tried to understand the environmental impacts of the North Atlantic Free-Trade Agreement. [ Grossman, G.M., Krueger, A.B., 1991. Environmental impacts of the North American Free Trade Agreement. NBER. Working paper 3914.] They found that, as economic growth increases initially there is an increase in environmental degradation but as economic growth continues in the later stages, environmental d...

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However, any economic activity makes use of natural resources. The use of natural resources also implies the production of waste. Using model 1 quadratic equations results in cases where regression levels allows for levels of indicators to become zero or negative. This is not appropriate as it does not reflect the use of natural resources and goes in contradiction to the laws of thermodynamics. In order to correct this the EKC model equation was revised by inserting a logarithmic dependent variable.[ Stern, D. (2004). The Rise and Fall of the Environmental Kuznets Curve. World Development Vol. 32, No. 8, pp. 1419–1439, 200. www.elsevier.com/locate/worlddev] The standard EKC regression model is: ln (E/P) = ai + b1 ln (GDP/P) it +b2 ln (GDP/P)2it + b3 ln (GDP/P)3it + b4zit + cit where E is emissions, P is population, and ln indicates natural logarithms.