The Environmental Kuznets Curve, pt. 1

One of the first theories that I have encountered in environmental economics is the Environmental Kuznets Curve. In this and the next post, I would like to summarise my understanding and thoughts of it so far. 


In the 50s, economist Simon Kuznets proposed a hypothesis that as per capita income increases, income inequality also rises at first, but starts falling after a certain turning point. This relationship can be represented by an inverted U-shaped curve, known as the Kuznets Curve. In the 90s, the Kuznets Curve found new application in the environmental studies, when several studies provided evidence that environmental quality, as measured by the concentration of some pollutants, deteriorates initially at low levels of per capita income and then improves at higher levels (see Fig. 1). Because of its resemblance to the original Kuznets Curve, this relationship was given the name the Environmental Kuznets Curve (EKC) (Yandle, Vijayaraghavan andBhattarai, 2002).

Fig. 1: Environmental Kuznets Curve. (Source: Yandle, Vijayaraghavan and Bhattarai, 2002)

 Since then, the EKC has become a common feature in the literature of environmental policy. While the empirical branch of the literature has sought for similar patterns for additional indicators of environmental quality, theoretical research has proposed a number of theoretical explanations for an inverse U-shaped pollution-income relationship, with focus on the descending branch of the curve.

 First, as economic development progresses, structural changes take place where pollution-intensive industries are replaced by information-intensive industries and services. Structural changes of advanced economies are accompanied by the export of pollution-intensive industries to less-developed economies, where environmental regulation is less stringent, known as the pollution haven hypothesis. This also suggests the influence of trade on the distribution of pollution. (Alstine and Neumayer, 2010). Here lies a major criticism of the EKC, as the least-developed countries would have nowhere to outsource their pollution, meaning that the EKC is not indefinitely replicable (Andreoni and Levinson, 2001).

 A second theory is based on the idea of income elasticity. At low levels of income, the income elasticity of demand is high for sustenance and low for environmental amenities. As income rises, the income elasticity of demand for environmental quality also increases. At certain threshold, it becomes greater than 1 and environmental quality is a luxury good. Yandle, Vijayaraghavan and Bhattarai (2002) argue that this market phenomenon stems from fundamental changes in institutions. For instance, “the movement along an EKC is also a movement through a well-known set of property rights stations”, i.e. the environment shifts from a commons to a private property, which gives people more incentives to manage and conserve it. 


At this point, it is worth mentioning another criticism regarding the universality of the EKC. It has been found to be applicable to only certain types of pollutants such as SO2 and nitrogen oxides which cause mostly localised environmental problems. Conversely, in the case of CO2, “the evidence is at best mixed”(Galeotti, Lanza and Pauli, 2005), as it is a global pollutant that involves cross-border externalities. No country has sufficient incentive to internalise these externalities, creating a not-in-my-backyard situation (Levinson, 2002). This again highlights the need for more advanced institutions that facilitates multilateral cooperation, for example the Paris Agreement. 


In conclusion, I believe it is vitally important to note that the EKC does not suggest that developing countries should just follow the old path of “grow (pollute) first and clean up afterwards”(as it might appear at first glance). But quite on the contrary, the aforementioned theories and criticisms surrounding this hypothesis suggest that economic growth alone does not solve environmental problems. Improvement of the environment relies on good policies and institutions which have the potential to help flattening the curve and achieving an earlier turning point.