Kuznets Curve

An environmental Kuznets curve (EKC) is a statistical artifact that, for a single country, sample of countries, or other political regions, shows graphically the estimated relationship between a specific measure of environmental quality—say, the concentration of sulfur dioxide for a specific set of air quality stations—and some measure of per capita income. The device got its name from a famous economist, Simon Kuznets, who discovered a relationship between the distribution of income and income growth in developing countries. Kuznets found that income distribution in developing economies begins highly skewed but becomes more equal with higher per capita income. When mapped with a measure of income distribution measured on the vertical axis and per capita income on the horizontal axis, the Kuznets curve looked like an inverted U.

When EKCs are estimated and drawn with a measure of environmental pollution on the vertical axis and per capita income on the horizontal axis, an EKC enables one to infer what happens to environmental quality when incomes rise or fall. The relationship may indicate that growth in income is associated with environmental decay. Alternately, the EKC may show that rising incomes are associated with improved environmental quality. In fact, EKCs can and do show a variety of relationships for different countries, different time periods, and different pollutants. Furthermore, it is possible to find several different pollution/income relationships for differing income levels when focusing on one country for different time periods or for a sample of countries for one time period.

Zones along an EKC that show a changing environment/income relationship for the same country sample are found in a growing body of evidence that supports the notion that some, but not all, EKCs are shaped like an inverted U for a number of important environmental pollutants and activities. The accompanying theory suggests that human communities in early stages of development are more concerned about keeping body and soul together than about clear sunsets and clean water. As incomes increase, and more basic human needs are met, the rate of environmental deterioration declines. Finally, deterioration ends with additional income growth, which is to say the inverted U reaches its peak. From that point forward, rising incomes are associated with improved environmental quality. One may think of the first EKC zone, where incomes are low and rising, as representing a race to the bottom. The zone after the peak may be thought of as representing a race to the top.

[Page 256]It is important to keep in mind that not all EKCs conform to the inverted U shape. Indeed, some are linear, suggesting that environmental decay continues systematically with income growth across all levels of income. Other estimated EKCs appear to strap together two functions and look more like an inverted U with a tail that shows a second phase of growth in deterioration after environmental quality has recovered to a high level.

EKCs emerged on the scene in the 1990s, when Eugene Grossman and Alan Kreuger, two Princeton economists, reported a strong statistical relationship between some commonly used measures of environmental quality and per capita income for a cross-section of countries. Their innovation brought important focus to debates about the North American Free Trade Agreement (NAFTA). At the time, it was clear that no one really knew the relationship between income growth, which was a fundamental basis for NAFTA support, and environmental quality. Many thought industrialization would lead to decay. Others thought higher incomes would lead to environmental improvement. Grossman and Krueger saw the environmental arguments opposing NAFTA as a refutable hypothesis that could be tested with data. To do this, they assembled panels of World Bank data on air quality and per capita gross domestic product (GDP) data for a sample of 42 countries for sulfur dioxide emissions and 19 for smoke and estimated statistical models to find the relationship between per capita GDP and environmental quality. Their results supported the notion that lower-income countries did accept higher levels of air pollution and indicated that higher-income countries were associated with lower, not higher, levels of air pollution. Grossman and Krueger identified the turning point—the range of per capita GDP where the race to the bottom ended and the race to top begins. The range of per capita GDP at the turning point was roughly $7,800 to $9,800 in 2008 dollars for sulfur dioxide and smoke. No turning point was found for suspended particulates, which they also estimated. Interestingly enough, Mexico's per capita GDP at the time fell within the EKC turning point range. One could infer that if NAFTA generated higher GDP for Mexico, then the people of Mexico would demand improved air quality, at least for sulfur dioxide and smoke.

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