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Ecological Economics 28 (1999) 267 277

ANALYSIS

A dynamic approach to the Environmental Kuznets Curve


hypothesis

Jean Agras *, Duane Chapman


Department of Agricultural, Resource, and Managerial Economics, Cornell Uni6ersity, Warren Hall, Ithaca, NY 14853, USA

Received 13 October 1997; received in revised form 16 March 1998; accepted 26 March 1998

Abstract

The Environmental Kuznets Curve (EKC) hypothesis states that pollution levels increase as a country develops, but
begin to decrease as rising incomes pass beyond a turning point. In EKC analyses, the relationship between
environmental degradation and income is usually expressed as a quadratic function with the turning point occurring
at a maximum pollution level. Other explanatory variables have been included in these models, but income regularly
has had the most significant effect on indicators of environmental quality. One variable consistently omitted in these
relationships is the price of energy. This paper analyzes previous models to illustrate the importance of prices in these
models and then includes prices in an econometric EKC framework testing energy/income and CO2/income
relationships. These long-run price/income models find that income is no longer the most relevant indicator of
environmental quality or energy demand. Indeed, we find no significant evidence for the existence of an EKC within
the range of current incomes for energy in the presence of price and trade variables. 1999 Elsevier Science B.V. All
rights reserved.

Keywords: Environmental Kuznets Curve; Energy; Carbon dioxide; Dynamic analysis

1. Introduction country develops, but begin to decrease as rising


incomes pass beyond a turning point. This is
The Environmental Kuznets Curve (EKC) hy- reflected as an inverted-U curve, expressing the
pothesis states that pollution levels increase as a relationship between pollution levels and in-
come. This hypothesis was first proposed by
* Corresponding author. Tel.: + 1 607 2555425; fax: +1 Grossman and Krueger in 1992 (Grossman
607 2559984; e-mail: jma4@cornell.edu and Krueger, 1992), and restated by them in

0921-8009/99/$ - see front matter 1999 Elsevier Science B.V. All rights reserved.
PII S0921-8009(98)00040-8
268 J. Agras, D. Chapman / Ecological Economics 28 (1999) 267277

1995.1 In their view it arises from a complex set of between energy use and income to determine if the
relationships that have not yet been fully identified. EKC exists here as well. Also, because CO2 arises
One variable that has consistently been omitted everywhere from fossil energy use2, we examine the
in the conceptualization of the EKC relationship is CO2-income relationship in an EKC framework.
energy price. The interaction between pollution and One further problem with testing the EKC hy-
energy prices is explainable through economic pothesis involves the issue of international trade.
theory and is clearly illustrated in the following Stern et al. (1996) point out that the assumption
stylized facts. Total global carbon (CO2) emissions that changes in trade relationships associated with
declined from 1979 to 1982, corresponding to the development have no effect on environmental qual-
steep, brief spike in oil prices in the late 1970s and ity severely limits conclusions reached from EKC
early 1980s, when crude oil peaked at $50/barrel analyses. As countries develop, they can improve
(Brown et al., 1996; in 1994 US$). Since 1985, as domestic environmental quality by importing more
nominal oil prices have stabilized in the $15 20 per pollution intensive goods, but at the expense of
barrel range, there has been a steady increase in environmental quality in other nations. We incor-
CO2 emissions (Brown et al., 1996). The pattern is porate trade variables in an EKC relationship to
consistent across developing and industrialized na- test their importance.
tions. In this paper we reformulate the traditional This paper tests three related propositions: (i)
EKC model by including energy prices in dynamic there will be an EKC for energy; (ii) energy prices
EKC relationships. strongly influence EKCs for energy and CO2; and
The EKC hypothesis has usually been investi- (iii) trade is an important structural aspect of the
gated by analyzing the relationship between a EKC.
specific pollutant (ambient concentrations of sulfur
dioxide (SO2), suspended particulate matter (SPM),
etc.) and income. This practice has developed, in 2. Review of EKC findings
part, because of the widely available UNEP data
on pollution concentration levels in urban areas The literature on this topic began in 1992 with
(United Nations Environment Program, 1991). the paper by Grossman and Krueger and has
However, since emission sources are strongly influ- exploded since (see Shafik and Bandyopadhyay,
enced by location of rural natural resource extrac- 1992; Agras, 1995; Holtz-Eakin and Selden, 1995;
tion, a countrys urban concentrations of SO2 in Selden and Song, 1994; Tucker, 1995; Suri and
many cases do not reflect that countrys sulfur Chapman, 1998; and others3). The common thread
emissions. This is particularly true with respect to that runs through all these models is estimating a
copper ore smelting, oil refining and desulfuriza- quadratic, or log quadratic, relationship between
tion, and natural gas processing and desulfuriza- some measure of environmental degradation (am-
tion. Since energy is used everywhere, and most bient concentrations of SO2, per capita emissions
forms of energy use release pollutants, we add to of CO2, suspended particulate matter, lack of safe
the EKC literature by evaluating the relationship water, lack of urban sanitation, annual deforesta-
tion, municipal solid waste per capita and others)
and per capita income4 to test the inverted-U shape
1
The first use of the term, Environmental Kuznets Curve, of the EKC. Additional explanatory variables for
can be traced to a paper by Panayotou (1993) written for the
investment shares, electricity tariffs, debt per cap-
World Employment Programme Research Working Paper se-
ries. The first use of it in an academic journal was by Selden
and Song (1994). The original Kuznets Inverted-U hypothesis
3
refers to the relationship between income inequality and per There are forthcoming special issues on the EKC in both
capita income that in early stages of economic growth the Ecological Economics (Vol. 25, No. 2) and Environment and
distribution of income worsens, while at later stages it im- Development Economics.
4
proves (Kuznets, 1955). Usually taken from the Penn World Tables (Summers and
2
Of course, anthropogenic CO2 originates from other Heston, 1991). All income variables are in 1985 international
sources, but oil, natural gas and coal use always release CO2. prices, unless otherwise stated.
J. Agras, D. Chapman / Ecological Economics 28 (1999) 267277 269

ita, political rights, civil liberties and trade have imports and exports of all manufactured goods to
also been added to many of these models. (Please domestic production of manufactured goods as
see the summary in Table 1). However, in the end, separate variables (Mmfg/GDPmfg and Xmfg/
most studies concluded that income has the most GDPmfg) in an EKC framework. The coefficients
significant effect on environmental quality of all of these two variables were expected to be nega-
the explanatory variables tested. tive and positive, respectivelylower emissions
A comparison point for all of these models is with increased manufactured imports and higher
the turning point of the quadratic relationship emissions with increased exports. With per capita
between income and pollution, that is the point at energy use as the dependent variable, they found
which countries will begin to demand better envi- turning points at per capita income levels from
ronmental quality. For SO2, Shafik and Bandy- $140000 to over $200000 with the inclusion of the
opadhyays (1992) turning point was consistent trade variables.7 For the most part, the trade
with Grossman and Kruegers (1992), at around variables were of the correct signs and highly
$5000 per capita income. Agras (1995) found an significant. Their work shows that trade in manu-
Asian turning point of $6654, while Selden and factured goods has an important structural effect
Song (1994) consistently found turning points of on per capita energy use.
over $8500. Due to the current and projected Recently, authors have estimated EKCs for
distribution of per capita GDP and population, CO2 emissions. Holtz-Eakin and Selden (1995)
Selden and Song (1994) found that emissions did a traditional EKC analysis with CO2 as the
would be increasing through the year 2100 for dependent variable. Turning points were esti-
most pollutants. mated at $35428 with a quadratic function and $8
One concern in these analyses is the lack of, or million with a log quadratic specification, which
poor representation of trade. The trade variable would indicate caution when interpreting these
most often used is the ratio of the sum of exports results. Tucker (1995) looked at changes in CO2
and imports to income, specifically (X + M)/GDP versus income in yearly cross-sectional analyses.
(Table 1). This variable captures total trade, but Within the time period 19711991 (especially
may not reflect the impact of the differential from 1977 to 1991), in a quadratic relationship, he
competition between imports and exports. Wycoff found that the coefficients shift in a continuous
and Roop (1994) emphasized this point when they pattern, such that the turning point is decreasing
found that the total carbon embodied5 in imports over time. He also notes that changes in CO2
for six countries6 was one-fifth of the amount emissions are clearly related to changes in oil
produced annually by the US, more than is gener- prices, but does not incorporate them into his
ated by Japan, and double that produced by analysis.
France or Canada. The percentage of carbon In summary, the EKC literature finds that as
embodiment in imports of manufactured goods to incomes rise, there is a domain of incomes over
total carbon emissions ranges from just 8% for which per capita measures of environmental
Japan and the US to over 40% for France. This degradation, pollution, or energy use declines. In
illustrates the importance of including trade as an general, neither trade nor energy prices have been
explanatory variable for changing pollution levels considered to be important explanatory factors in
within nations. most of the empirical work to date. This study
Suri and Chapman (1998) included the ratios of provides interpretive analysis of the EKC with the
incorporation of trade variables and energy
prices.

5
Embodied refers to the total carbon released from energy
used in production of commodities.
6 7
The countries included Canada, France, Germany, Japan, They estimated a turning point of $54000 without trade
United Kingdom and the US. variables.
270

Table 1
EKC econometric specifications: prior work

Author Dependent variable(s) Independent variable(s) Type of function Fixed effects Corrected for
autocorrelation

Grossman and Ambient Sulfur Dioxide (SO2) Per capita GDP; Population Cubic in GDP Random and fixed site No
Krueger (1992) Ambient suspended particu- density; Trade {(X+M)/ effects
lates (SPM) Dark matter GDP}; Linear time trend and
other site specific
Grossman and Same as above, as well as: Same as above, as well as: Cubic in GDP and lagged Random effects Yes
Krueger (1995) Dissolved Oxygen, Biological lagged per capita GDP; Mean GDP (except for coliforms
Oxygen Demand, Chemical annual water temperature; ex- which is log cubic)
Oxygen Demand, Nitrates, Fe- cept: trade
cal Coliform, Total Coliform,
Lead, Cadmium, Arsenic,
Mercury, Nickel
Shafik and Lack of safe water; Lack of Per capita GDP; Time trend; Log linear, log quadratic, and Random and Fixed city, ?
Bandyopad- urban sanitation; Annual de- Investment shares; Income log cubic in GDP site or river effects
hyay (1992) forestation; Total deforesta- growth; Electricity tariff;
tion; Dissolved oxygen in Trade: (X+M)/GDP; Dollars
rivers; Fecal coliform in rivers; index of trade orientation;
Ambient SPM; Ambient SO2; Debt; Political rights; Civil
Municipal waste per capita; liberties
Per capita carbon dioxide
(CO2)
Selden and Song Per capita SO2, SPM, nitrogen Per capita GDP; Population Quadratic in GDP Fixed country/year effects Yes
(1994) (NOX), and CO density
Holtz-Eakin and Per capita CO2 Per capita GDP Quadratic and log quadratic Fixed country/year effects Yes
J. Agras, D. Chapman / Ecological Economics 28 (1999) 267277

Selden (1995) in GDP


Panayotou (1993) Rate of deforestation Per cap- Per capita GDP; Population Translog for deforestation Random effects No
ita SO2 NOX emissions SPM density; Tropical country Log quadratic for SO2, NOX
emissions dummy and SPM
Suri and Chap- Per capita energy Per capita GDP; Import man- Log quadratic in GDP Fixed country and year Yes
man (1998) ufacturing ratio; Export man- effects
ufacturing ratio
J. Agras, D. Chapman / Ecological Economics 28 (1999) 267277 271

3. Simplification of the general model Chapman (1998).8 We test two EKCs using both
per capita energy consumption and per capita
Since many of the available explanatory vari- CO2 emissions to represent environmental
ables have been tried in this framework, the main degradation.9
direction of generalization is in the order of dy- We have basically set-up an autoregressive-dis-
namics. As has been often noted, in most cases a tributed lag formulation (AD(1,1)10) and despite
time series model should be regarded as a dis- the simplicity of this model, most every type of
tributed lag model until proven otherwise (Sims, single-equation model in empirical time series
1974). econometrics is a special case of it (Hendry, 1995).
All of the EKC studies use functional forms Our aim is to show that the partial adjustment
where results can be evaluated with respect to the model (AD(1,0)), with price replacing the time
presence or absence of a turning point and the effects, best identifies this data. In a partial adjust-
significance of its parameters. The analysis of the ment model, short-run elasticities capture the
relationship between some measure of environ- change in use of existing stock. For example, if
mental degradation, ED, and real per capita in- energy prices rise, consumers may drive less and
come, Y, and other variables, Z (for example, try to conserve energy in the home by turning
population density, trade, investment, etc.), has down thermostats. These are changes in rates of
usually taken the following form in the literature use. Long-run elasticities capture these rates of
(Eq. 1): use changes, as well as changes in the structure of
capital. For example, consumers may prefer more
ln(EDit)= ai +gt +b1ln(Yit) + b2 {ln(Yit)}2 fuel efficient cars and make investments in insula-
tion for their homes. The partial adjustment
+bk ln(Zit) + eit (1)
model allows us to see how quickly each of these
where ai is a fixed country or site-specific effect, gt changes is being made.
is a fixed time effect, i is a country index, t is a Our estimates for an EKC for energy using the
time index, and eit is a stochastic error term. The traditional model employed by a majority of au-
turning point value is Y(TP) = e b12b2, where b1 thors are shown in Table 2. While a few authors
is the coefficient for the income variable and b2 is have reported correcting for autocorrelation in
the coefficient for the income squared term. their models (Grossman and Krueger, 1995;
We let the general model take the form (Eq. Holtz-Eakin and Selden, 1995; Selden and Song,
(2)): 1994; Suri and Chapman, 1998), many have not.
The Durbin-Watson statistic of 0.672 shows that
ln(EDit)= ai +gt +b1 ln(EDit 1) + b2 ln(Yit) runs not correcting for autocorrelation run the
risk of spurious regression. However, once first
+b3 ln(Yit 1) + b4 {ln(Yit)}2

+ b5 {ln(Yit 1)}2+b6 ln
 
M
order autocorrelation is accounted for, the model

   
GDP it 8
The data for the income and trade variables come from
Summers and Heston (1991) and the United Nations (1991/
M X
+ b7 ln +b8 ln 1992), respectively, and the countries used include Argentina,

 
GDP it 1 GDP it Australia, Austria, Bangladesh, Brazil, Canada, Chile, China,
Denmark, Finland, France, Germany, Greece, Hong Kong,
X
+ b9 ln +eit (2) Iceland, India, Indonesia, Italy, Japan, Kenya, Korea,
GDP it 1 Malaysia, Mexico, Netherlands, Norway, Pakistan, Portugal,
Spain, Sweden, Thailand, Turkey, United Kingdom, United
where the variables are as defined as above and States and Zimbabwe.
9
the trade variables are the ratio of imports of all The data for the energy and CO2 variables come from
manufactured goods to domestic production of all International Energy Agency (various years (a)) and Oak Ridge
National Laboratory (1992), respectively.
manufactures (M/GDP) and the ratio of exports 10
AD(p,q) refers to an autoregressive-distributed lag formu-
of manufactured goods to domestic manufactur- lation with the dependent variable lagged p times and the
ing production (X/GDP), as used in Suri and independent variable(s) lagged q times.
272 J. Agras, D. Chapman / Ecological Economics 28 (1999) 267277

Table 2 Fig. 1 shows the movement of gasoline prices


Agras-Chapman results: traditional EKC for energy (explana-
(Chapman, 1997; in real $) and the time specific
tory variables in natural logarithms; standard errors in paren-
theses) intercepts for the estimated energy model. Exam-
ining the time coefficients, gt, estimated in Eq. (1),
A. E= ai+gt+125Y(0.04)0.13Y2(0.01)0.05 M/ with per capita energy as the dependent variable,
GDP(0.02)+0.09 X/GDP(0.01)
B. EA= ai+gt+1.16Y(0.05)0.11Y 2(0.02)0.03 M/
it is obvious that the inclusion of variables for
GDP(0.02)+0.10 X/GDP(0.01) individual years captures the change in energy
(gasoline) prices over the time period. There is an
NOTE: Please see variable definitions in text discussion of obvious inverse correlation between the coeffi-
Eqs. (1), (2) and (4). EA in this table means that these
coefficient values result from the estimating method which cients and gasoline prices. A rise in prices from
corrects for autocorrelation. Subscripts for country (i) and 1978 to 1980 corresponds to a significant decrease
time (t) are implicit. in the value of the time coefficient. This indicates
that, holding all else constant, countries are using
achieves good results and is comparable across less energy per capita as energy prices increase.
further extensions. We find that the autocorrelation Similarly, a price decrease from 1981 is shortly
adjustment makes some change in coefficient val- followed by an increase in the time coefficient as
ues. countries re-adjust to lower prices and become
The results of our general model for energy are less concerned about conserving energy. Since the
included in Table 3. The first hypothesis that we time coefficients track a change in energy prices,
tested is the order of dynamics on each of the we test whether the price variable is a better
variables. Specifically, we test the hypothesis that estimator than the fixed time effects model.
the coefficients on the lagged independent variables Specifically, we compared the simplified model,
are all simultaneously zero (Eq. (3)).
with time and country effects, to our restricted
b3 = b5 =b7 =b9 =0 (3) preferred model (results reported in Table 3),
without time effects, but with a variable for price.
In testing this hypothesis, the calculated F-statistic
We tested the hypothesis that the price variable is
is 6.90. Compared with the critical value of F(4,
559, 0.01)=3.32, the calculated statistic is highly preferred to a fixed time effect. In testing this
significant. Therefore, we have reduced the general hypothesis, the calculated F-statistic of 4.59 is
AD(1,1) model to a simplified AD(1,0) model, significantly greater than the critical value of
including only the lag of the dependent variable. F(17, 572, 0.01)= 2.32, leading to acceptance of
The second hypothesis that we tested is replacing the restriction.12 Our preferred models results are
the fixed time effects with a variable for price.11 listed in Table 3.

11
The price variable used is gasoline prices in the US
12
(Chapman, 1997; in real $). Since we used the same numbers Using restricted and unrestricted models F calc =
across all countries, including the time effects would create a (SSER SSEU)/((SSEU)(dfU)/(dfR U) =4.593, which is
singular matrix. greater than the critical value of F(17, 572, 0.01) = 2.32.

Table 3
Agras-Chapman results: dynamic model for energy (explanatory variables in natural logarithms; standard errors in parentheses)

A. General dynamic model without price variable


E =ai+gt+0.81E1 (0.02)+0.45Y (0.09) 0.20Y1 (0.09) 0.01Y 2(0.03) 0.04Y1
2
(0.03) 0.004 M/GDP (0.02)
0.003 M/GDP1 (0.02) +0.015 X/GDP (0.01) 0.005 X/GDP1 (0.01)
B. Preferred dynamic price model
E = ai+0.76E1 (0.03) +0.31Y (0.04) 0.04Y 2 (0.01) +0.006 M/GDP (0.01) +0.001 X/GDP (0.01) 0.09P (0.01)

See notes to Table 2. The subscript 1, as in E1, means that the variable is lagged 1 year.
J. Agras, D. Chapman / Ecological Economics 28 (1999) 267277 273

Fig. 1. Trend of oil prices and time coefficients for energy model.

ln(Eit)= ai + b1 ln(Eit 1)+ b2 ln(Yit)


 
The partial adjustment model that we estimated
using per capita energy consumption, E, as the
M
measure of environmental degradation has the + b3 {ln(Yit)}2 + b4 ln

 
following form (Eq. (4)): GDP it

X
+ b5 ln + b6 ln(Pt)+ eit (4)
GDP it

With this formulation the time response parame-


ter, b1; the short-run elasticity for the price of oil,
Table 4 b6; the long-run price elasticity, b6/(1 b1); and
Agras-Chapman results: traditional EKC for CO2 (explana- the turning point for income e ( b2)/(2b3) are easily
tory variables in natural logarithms; standard errors in paren- calculated. b6 represents a rate of use effect, high-
theses) lighting immediate changes made by individuals/
A. CO2 =ai+gt+1.42Y (0.06) 0.18Y 2 (0.02) 0.005
companies in response to changes in energy
M/GDP (0.2) +0.08 X/GDP (0.02) prices. The difference between the short- and
B. CO2A= ai+gt+1.20Y (0.07) 0.13Y 2 (0.02) 0.02 long-run price elasticities is the capital investment
M/GDP (0.02) +0.09 X/GDP (0.02) effect, illustrating changes in investments of capi-
tal and stock over a longer time period.
NOTE: Please see variable definitions in text discussion of
Overall the results are very strong. Estimates of
Eqs. (1), (2) and (4). CO2A in this table means that these
coefficient values result from the estimating method which the main parameters all have the expected signs.
corrects for autocorrelation. Subscripts for country (i) and The values on b1 are not so high as to explain all
time (t) are implicit. the effects, but still remain the most significant
274 J. Agras, D. Chapman / Ecological Economics 28 (1999) 267277

Table 5
Agras-Chapman results: dynamic model for CO2 (explanatory variables in natural logarithms; standard errors in parentheses)

A. General dynamic model without price variable


CO2 =ai+gt+0.84 CO21 (0.02) +0.52Y (0.12) 0.28Y1 (0.12) +0.02Y 2 (0.04) 0.06Y1
2
(0.04) 0.005 M/GDP (0.02)
0.017 M/GDP (0.02) +0.034 X/GDP (0.02) 0.031 X/GDP1 (0.02)

B. Preferred dynamic price model


CO2 =ai+0.84 CO21 (0.02) +0.26Y (0.04) 0.05Y 2 (0.01) +0.031 M/GDP (0.01) 0.015 X/GDP (0.01) 0.08P (0.01)

See notes to Table 4. The subscript 1, as in Y1, means that the variable is lagged 1 year.

independent variable in all the models. The values in other studies (Holtz-Eakin and Selden, 1995;
for b6 of 0.09 and for the long-run price elasticity Tucker, 1995). While we would expect the turning
of 0.37 fall in the range of other estimates of point for carbon to be lower than that for energy17,
price elasticities for oil13. Income elasticities14 of this is a striking difference. Again the trade vari-
0.17 in the short run and 0.70 in the long run are ables were insignificant and of the wrong sign.
also consistent with the literature.15 b2 and b3 have All of the hypotheses were supported, except for
the expected signs, and are statistically significant. the significance of the trade variables. The first
The turning point for per capita energy is calculated regression shows that last periods energy use is a
at $62000 for this model. However, the coefficients pretty good predictor of this periods energy use.
on the trade variables were insignificant in this This happens as annual changes in energy use are
model for energy. fairly small, especially in recent years. Short- and
Similarly, the results from our preferred model long-run price elasticities are of the correct sign and
of an EKC for CO2 were also strong, and with in acceptable magnitudes. However, the trade vari-
similar values16 (Tables 4 and 5). The short- and ables are insignificant and not of the proper sign.
long run price elasticities for CO2 were 0.08 and This is an interesting result and may imply that
0.49, respectively. The income elasticities were there are other relationships in these models that
0.07 and 0.41, lower than in the energy model. are not being explained. Exports could be an
However, the calculated turning point of $13630 is endogenous variable determined by the price of
surprisingly low, especially compared to estimates energy, but also determining the amount of energy
that is consumed.

13
Short-run price elasticities for oil were estimated by Dahl
(1991) to be 0.06 for developing countries and 0.35 for
developed countries. Long-run price elasticities for oil were 4. Conclusions
estimated at 0.17 for developing countries and 1.01 for
developed countries (Dahl, 1991). In general, most studies found statistically sig-
14
Income elasticities are calculated from the following for-
mula, using the average income of the data set: b2 + 2b3 ln Y. nificant results, confirming the EKC hypothesis for
15
Short-run income elasticities for oil range from 0.46 for many pollutants and other measures of environ-
developing countries to 0.74 for developed countries. Long-run mental quality. As GDP moves beyond the EKC
elasticities range from 1.03 for developing countries to 1.35 for turning points, it is assumed that the transition to
developed countries (Dahl, 1991).
16 improving environmental quality takes place.
We ran the same tests using CO2 as the dependent vari-
able as we did in the energy model and the results are reported Fig. 2 illustrates many of the forces that are
in Tables 4 and 5. Again, both of our hypotheses were driving the EKC relationship. The original EKC
accepted. analyses capture the upward movement as low-in-
17
At higher incomes we expect a switch away from coal and come countries move from agriculturally based
oil to cleaner fossil fuels and nuclear and hydroelectric power.
Although cleaner fossil fuels are not always as cost efficient,
economies to industrial economies, and then the
there may be an increased demand for them as people demand downward movement as industrial countries move
cleaner environments. into the post-industrial phase with services as a
J. Agras, D. Chapman / Ecological Economics 28 (1999) 267277 275

Fig. 2. Conflicting dynamics of the EKC curve.

larger part of the economy. Suri and Chapman insignificant, while in other work they have been
(1998) included independent variables for trade shown to have considerable explanatory value.
which captured the export-led growth, leading to The problem may be an over-identified model.
an increase in per capita GDP and pollution in The dependent variables are very slow moving18,
industrial developing countries, and the increase and many of the independent variables are highly
in imports of developed countries with the oppo- correlated. Trade and energy prices are both im-
site effect. portant variables, but trade variables become in-
Prior work has not explicitly included the price significant in a regression with both trade and
of energy as an independent variable. Fig. 2 illus- energy prices. Future work may clarify whether
trates the effect of declining energy prices: in- trade in energy-intensive commodities is influ-
creased energy use and energy-based pollution in enced by energy prices.
both developed and developing countries. The When one thinks of growth, typically increased
inclusion of this variable has strong implications energy use comes to mind. For individual coun-
for the EKC analysis. This could be because tries, options for economic growth with a lesser
energy use at all income levels is price elastic,
especially in the long run, causing increased en- 18
It is interesting to note that the energy and CO2 data that
ergy use, in the presence of declining real energy are used are very smooth throughout the years in the analysis.
prices, even at low but rising levels of GDP. A comparison of different sources of data (International En-
ergy Agency, 1989; United Nations, 1991/1992; Department of
Furthermore, the long-run price model causes Energy/Energy Information Administration (various years);
other factors to become insignificant that were International Energy Agency (various years (b)) did show
previously important. The trade variables are now some variation between sources.
276 J. Agras, D. Chapman / Ecological Economics 28 (1999) 267277

increase in energy use include: (1) rapid growth in emissions at 1990 levels by the year 2010, from
service industries; (2) importing more pollution our preferred model estimates, gasoline prices of
intensive goods; (3) installing domestic pollution $5.14/gallon (in US$1997) by the year 2010, hold-
control devices; and (4) increasing energy effi- ing all else equal, would accomplish this goal.19
ciency. The first two involve reducing demand for We have found no significant evidence for the
energy domestically, but there will be a compen- existence of an EKC within the range of current
sating increase in demand for energy internation- incomes for energy in the presence of price and
ally. The third option can increase demand for trade variables. We conclude that policy based
energy, while reducing specific pollutants, as upon a wait and grow assumption is not ade-
many pollution control devices use more energy. quate. Governments need to undertake policies
The final option (energy efficiency), reduces de- now to begin to reduce levels of pollution and
mand for energy and reduces energy-based pollu- CO2 emissions. Future policies for climate change
tion at the same time. Fig. 2 illustrates how these and energy should explicitly recognize the need
different policies might affect individual countries for specific policies focused on economic incen-
and the EKC curve. tives and technological innovation.
There is an important distinction within the
EKC debate that needs to be clarified. In the
papers referenced, authors always report turning Acknowledgements
point estimates, while the corresponding global
and local levels of pollution at these turning We thank Timothy Mount for his help in the
points are seldom mentioned (Selden and Song econometric section of this paper. Preliminary
(1994) and Stern et al. (1996) being the excep- drafts were also reviewed by Mount, Harry de
tions). Policy prescriptions in the EKC literature Gorter, Neha Khanna and Richard Boisvert. An
discuss ways to shift the turning point to the left earlier version of this paper was presented at the
(lower levels of GDP), but have not mentioned WEA International 1997 annual meetings. We
reducing overall levels of pollution, which may be would also like to thank two anonymous review-
a more important issue. An increase in energy ers for their constructive comments.
prices is one of the few items on Fig. 2 that will
reduce overall global levels of energy-based
pollution.
With our conclusion that energy prices are an References
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19
reduce energy use. Gasoline prices are predicted The US emitted 1.32 billion metric tons of CO2 in 1990.
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