Demystifying the environmental Kuznets curve: turning a black box into a policy tool

TLDR

The reduced‑form approach to the income–environment relationship has been useful, but its lack of explicit determinants limits policy relevance. The study aims to embed explicit policy considerations into the income–environment relationship and examine its determinants to enhance understanding of its policy relevance. The authors investigate how the rate of economic growth and population density influence this relationship. For ambient SO₂, policies and institutions can markedly reduce degradation at low income levels and accelerate improvements at higher income levels, flattening the EKC and lowering the environmental cost of growth.

Abstract

The reduced-form approach to the income–environment relationship has been a useful first step towards answering the question of how economic growth affects the environment. However, without an explicit consideration of the underlying determinants of environmental quality, the scope for policy intervention is unduly circumscribed. In this paper a modest attempt is made to incorporate explicit policy considerations into the income–environment relationship and to explore its determinants as a step towards a better understanding of this relationship and its potential as a policy tool. The role of the rate of economic growth and population density is also explored. A main finding is that at least in the case of ambient SO 2 levels, policies and institutions can significantly reduce environmental degradation at low income levels and speed up improvements at higher income levels, thereby flattening the EKC and reducing the environmental price of economic growth.