Income, Trade, and Environmental Quality: An Environmental Kuznets Curve Approach

This paper analyzes the income-pollution relationship for three pollutants, carbon dioxide, sulfur dioxide, and nitrogen dioxide. Specifically, it aims to test this relationship in context of the Environmental Kuznets Curve (EKC) which suggests the existence of an inverted-U shape relationship between a country’s per capita income and its level of pollution. Three different pollutants are tested in order to examine the broadness of the EKC’s explanatory power, along with the robustness of the overall model. The premise of the EKC states that a country has the ability to “grow” out of its pollution problems by positing that increases in per capita income have the effect of increasing environmental quality. It is also important to note how a country’s international trade may influence its internal pollution levels. We control for this by including a measure of trade intensity in the model. It is argued that increasing trade liberalization can have differing effects from country to country in terms of pollution abatement. Pollution abatement may not only be affected by a country’s per capita income, but also by the comparative advantage a country has in pollution-intensive production. The results of this study indicate that an inverted-U shaped curve between per capita income and pollution exists for NO2 emissions but not for SO2 emissions. CO2 emissions expressed an “N” shaped relationship with income. Furthermore, it is found that a country’s trade intensity does not play much of a role in determining internal pollution levels.