Yes, there is an Environmental Kuznets Curve: economic development can be a pathway to lower per-capita emissions

Since the Industrial Revolution, economic development has been associated with the idea of ‘inevitable’ environmental degradation. It is widely recognised that economic activity is the primary driver of climate change through greenhouse-gas emissions. Politicians, meanwhile, often cast policies to reduce emissions as being in opposition to growth.

This way of thinking potentially harms the interests of poorer countries, where emissions will increase as their incomes rise. Forcing poorer countries to reduce emissions must therefore come at the cost of thwarting their aspirations to reach middle-income and eventually advanced-economy status. Economic development in poorer nations thus seems intrinsically at odds with the imperative of avoiding imminent climate tipping points.

However, the tension between economic development and environmental objectives may not be inevitable as is commonly assumed. This would be the case if the process of economic development itself fosters a complementarity between economic gains and emission reductions. This might reflect changes in the industrial composition of economic activity as economies move up the development ladder, technological advancement or heightened environmental consciousness in the population.

These forces are in line with the Environmental Kuznets Curve (EKC) hypothesis. The EKC holds that per-capita income growth is associated with increases in carbon emissions up to a certain threshold of economic development. Beyond that threshold, higher per-capita incomes are associated with lower emissions per capita. The validity of the EKC hypothesis is crucial for discussions about climate change because it identifies economic development as a pathway to environmental improvements.

My co-authors and I set out to test the validity of EKC hypothesis for a large sample of 191 countries from 1989 to 2022 – a global assessment of the hypothesis in contrast to the dominant approach in the academic literature, which emphasises country case studies or regional analyses. Perhaps unsurprisingly, previous studies have shown mixed results on the validity of the EKC hypothesis, likely because the relationship between economic development and emissions is influenced by a host of complex factors. Foremost among these is the impact of policies to reduce emissions, climate policies for short, and the extent to which they foster decoupling of emissions from economic activity. 

Our global analysis finds that emissions rise with increasing per-capita income levels, but only up to a turning point at about $25,000 on average. In other words, the EKC eventually bends down in an inverted U shape. Once the top of the EKC is reached, per-capita emissions tend to decline even as per-capita incomes keep rising.

The $25,000 threshold, however, is a global average. In advanced economies such as Australia, Canada, France and the United States, the threshold (high point of the EKC) is found at per-capita incomes of around $35,000-$50,000. Emerging-market and developing countries switch to a negative income-emissions relationship when per-capita income exceeds $5,000-$18,000.

These values imply that many countries – including China and India – are still in the upward-sloping segment of the EKC with both per-capita incomes and emissions rising. In contrast, most advanced economies reached the EKC inflection point during the mid-1990s. Some, including some of the Nordic countries and Switzerland, are already firmly in the downward portion of the EKC: they have higher per-capita incomes and lower per-capita emissions than poorer countries.

Our analysis also shows that climate policies critically influence the shape of the relationship between income and emissions. Climate policies make the EKC lower and flatter, thus favouring decoupling between emissions and economic activity. With sufficiently stringent climate policies – around the 75^th percentile of environmental policy stringency in our sample – the relationship between per capita incomes and emissions disappears entirely (the EKC is flat). Market-based climate policies, such as emissions trading systems and, especially, carbon taxes, have a greater impact on the EKC than non-market-based policies, such as emission limits.

Our results indicate that pursuing economic development and environmental quality are not necessarily at odds, as higher incomes may allow economies to adopt virtuous green practices that reduce emissions. In the path towards decoupling emissions and economic activity, the role of governments is crucial, through the implementation of stricter climate change policies.

The EKC is a useful construct and finds support in the data. But it also has policy relevance. Countries should not sacrifice development goals for environmental ones. But countries should redouble efforts to contribute to the global push to avoid climate tipping points and to rapidly reduce carbon emissions. Such actions improve the trade-off between emissions and growth, and foster decoupling.