The environmental Kuznets curve

The question of interest for the current analysis is the effectivity of policy measures on energy use as a result of the implementation of the Kyoto Protocol obligations.

This raises the question of how realistic the set objectives of the European Union climate change protection policies are and whether they can realistically be fulfilled.

Thus, for the EU, as a common economic area, the state of economic evolution must be evaluated.

A very important theory about the further development of emissions is the Environmental Kuznets Curve (EKC). It is based on the theory of Kuznets (1955) about the development of a country, which follows a natural cycle of rapid growth and linked growth of inequality. In theory, after a certain level of affluence, named the income, inequality will decrease if the country continues to experience economy growth. The EKC describes the interrelated trend of growth and damage caused to the environment as a concave curve, with an exact turning point where the correlation between growth and emissions turns from positive to negative: a higher output to the right of the turning point is associated with lower emissions and vice versa.

This theory is highly controversial and various analyses consider a squared income variable to control for the Kuznets' theory and its potential turning points. If a turning

author

(2004) world wide data literature review of

cross-country analysis with

CO2 emission not only driven by carbon intensity and

Table 6: Literature review I of analysis used as a basis of the empirical model of chapter 4.

point exists, it can help to identify country groups with homogenous development and / or economic conditions.

Table 6 summarises the most important sources of the following literature review including some of the studies already cited. All the sources provide further input for the variables of the applied model in 4.3. It gives a scheme of the panel data analysis in the following chapter and the linkages of each of the studies to the general Kuznets discussions.

According to de Bruyn et al. (1998), the long-term trend in developed nations, of an association between growing emissions and times of economic growth is not clearcut: once GDP is on a high level and only growing moderately, high-level technical innovations compensate for growth in emissions. However, this cannot be conclusively measured. The authors describe individual differences in nations Kuznets curves, in which in general increasing incomes lead to increasing emissions until, at a certain level, emissions again decrease while incomes continue to rise.⁶³ This emphasises the examination by Soytas et al. (2007) regarding the causes of CO2 emissions in the USA, whereby long-term energy consumption has an effect on overall emissions, while changes in income have only a short-term effect. The authors found a Kuznets relation for income and energy consumption, but not for income and emission. Thus economic growth and emissions are not directly correlated and a reduction in emissions does not necessarily cause a lower growth rate. They close with the recommendation that sustainable environmental policy should focus on measures to lower emissions through reductions in energy intensity.

Stern (2004) does not discard the EKC theory, but confirms that by adopting innovative technologies, poorer countries show the same effects, with only a short time lag at a lower income level. Geller et al. (2006) empirically prove a decoupling of growth and rising energy usage, as more efficient technologies show meaningful substitution effects: end consumers use more electricity, instead of producing the power themselves, and power production through the utility sector has a higher degree of efficiency.

At first glance, the findings of Ciarreta and Zarraga (2010) appear to contradict these results, showing a positive correlation between energy consumption and GDP growth. Their dataset described the period 1970 - 2003. While the effect over the

63 Kuznets theory is based on the differences between countries, but also concerns the standard deviation in homogeneity over a time period analysis in a single country.

long term is indisputable, at least in the short run no effect can be demonstrated.

Thus the analysis fits the data.

The controversial discussion of the EKC can hardly be summarised, as the literature does not clearly decide for or against the Kuznets curve theory. In every case, all the analyses show the interest in and the presence of other factors besides GDP, which may influence energy use.

Dasgupta et al. (2002) try an evaluation of the theory without testing it empirically.

They propose to take into account the technological development, international cooperation, and the higher accumulation of capital nowadays, which allows even less developed countries to follow a growth path without extending damages to the environment. Thus, the Kuznets curve is expected either not to exist, become flatter, or have the turning point shifted left which means that growth is coupled with a lower or negative marginal growth rate of emissions with the consequence that high income economies are having a lower increase of GDP in relation to the growth of emissions (or energy consumption) than low income economies have.

Another crucial point to address is the concentration of most applied Kuznets analyses on CO₂ and/or other ecological damages. As shown in chapter 2, theses damages are difficult to determine and to value. The Kuznets curve may describe theoretical turning points of nations' GDP where higher emissions cause a decrease in economic development, but the relation itself remains unclear. All citied studies can explain well the factors which influence energy consumption respectively emissions apart from their positive or negative assumption regarding the Kuznets hypothesis.

The factors must to be considered in a further analysis.

The conclusion from the above literature review (see table 6 for an overview) is that an applied econometric model should demonstrate the influence of various factors on energy use on the one hand, and on the other, that the relation between environmental impacts, carbon emissions or energy consumption and GDP is not as close as postulated by the environmental Kuznets hypothesis. In addition to factors like affluence or growth, other influences have to be taken into account, for example the influences of the obligations of the BSA obligations on energy efficiency (e.g.

through policy measures, new compliance standards, or regulations) or pressure on policy makers through the emission level of the economy.