Environmental Kuznets Curve and Green Regulation

Luca Bettarelli, Davide Furceri, Prakash Loungani, Jonathan D. Ostry and Loredana Pisano

No 19900, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In this paper, we first test the validity of the Environmental Kuznets Curve (EKC) hypothesis, using a large sample of approximately 190 advanced and developing countries, over a period of 34 years (1989-2022). We find that (CO2) emissions respond positively to increasing income per-capita, up to a turning point of approximately US$25,000. In a departure from the previous literature, we allow the relationship between economic development and emissions to depend on the stringency of environmental regulation. Our results indicate that environmental policies—and particularly market-based instruments, such as carbon taxes and emission trading systems—make the EKC lower and flatter. These results are robust to several sensitivity checks, and to the use of regional (rather than global) data. Overall, our results have important policy implications, as they identify economic development as a pathway to environmental improvements. Moreover, we show that environmental policies are an essential ingredient to achieve decoupling of emissions and economic output over the longer term.

Keywords: Environmental kuznets curve; Climate change policies; Decoupling; Carbon tax (search for similar items in EconPapers)
JEL-codes: C33 Q53 (search for similar items in EconPapers)
Date: 2025-01
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