A theoretical and empirical analysis of economic growth and environmental degradation

Abstract

In the following dissertation we offer a theoretical and empirical analysis of the relationship between economic growth and environmental degradation. Specifically, we seek to test the Environmental Kuznets Curve (EKC) hypothesis. This hypothesis postulates that pollution emissions follow an inverted-U shaped relationship with per-capita income as a country’s economy expands over time.

The goal of this study is to further examine and develop the EKC literature. We begin our analysis by offering a critical review of the literature. Based upon our review we see two main deficiencies within the literature: 1) there is lack of spatial considerations in the empirical literature; and 2) the empirical literature contains empirical irregularities because there is no generally accepted structural (or theoretical) explanation for the economic growth-pollution relationship. In other words, empirical EKC studies consist solely of reduced-form analyses between emissions and income.

To overcome these gaps within the literature we develop two interrelated essays. In the first essay we introduce a spatial-temporal estimation procedure for per-capita CO2 emissions and per-capita income in the 48 contiguous states within the United States. This procedure consists of a spatial-temporal panel data estimation scheme that controls for spatial and temporal dependence within the data. We find significant evidence that implies per-capita CO2 emissions follows the inverted-U shaped relationship with per-capita income. In the second essay we offer a theoretical model that explains how technological diffusion is driving down pollution emissions over a country’s economic development cycle. This relatively simple theoretical model seeks to determine which assumptions are necessary to test the hypothesized inverted-U shape of pollution emissions over time.