bstract

The Environmental Kuznets Curve (EKC) hypothesis postulates an inverted-U-

shaped relationship between different pollutants and per capita income, i.e.,
environmental pressure increases up to a certain level as income goes up; after that,
it decreases. An EKC actually reveals how a technically specified measurement of
environmental quality changes as the fortunes of a country change. A sizeable
literature on EKC has grown in recent period. The common point of all the studies is
the assertion that the environmental quality deteriorates at the early stages of
economic development/growth and subsequently improves at the later stages. In
other words, environmental pressure increases faster than income at early stages of
development and slows down relative to GDP growth at higher income levels. This
paper reviews some theoretical developments and empirical studies dealing with
EKC phenomenon. Possible explanations for this EKC are seen in (i) the progress of
economic development, from clean agrarian economy to polluting industrial economy
to clean service economy; (ii) tendency of people with higher income having higher
preference for environmental quality, etc. Evidence of the existence of the EKC has
been questioned from several corners. Only some air quality indicators, especially
local pollutants, show the evidence of an EKC. However, an EKC is empirically
observed, till there is no agreement in the literature on the income level at which
environmental degradation starts declining. This paper provides an overview of the
EKC literature, background history, conceptual insights, policy and the conceptual
and methodological critique.

Keywords
 Economic growth;
 Environmental Kuznets Curve;
 EKC;
 Environmental quality;
 Environmental protection;
 Pollution;
 Turning point;
 Inverted-U-shape

JEL classification
 N50;
 O13;
 Q20

1. Introduction
Worldwide deterioration of environmental quality has made many feel concerned
about the issue and mounting public concern over environmental issues has sparked
efforts to understand more clearly the reasons for environmental degradation. The
environmental effects of economic growth have been receiving increasing attention
of economists in recent years. One particular aspect, the linkage of environment with
economic growth/development, evoked much discussion in the last decade (i.e.,
1990s) and a sizeable literature on the pollution–income growth relationship has
grown in recent period. The common point of all the studies is the assertion that
environmental quality deteriorates in early stage of economic development/growth
and improves in later stage as an economy develops. In other words, environmental
pressure increases faster than income in the early stage of development and slows
down relative to GDP growth in higher income levels. This systematic relationship
between income change and environmental quality has been called
the Environmental Kuznets Curve (EKC). The inverted-U relationship derives its
name from the work of Kuznets (1955) who postulated a similar relationship between
income inequality and economic development. The logic of EKC relation is intuitively
appealing. In the first stage of industrialization, pollution grows rapidly because high
priority is given to increase material output, and people are more interested in jobs
and income than clean air and water (Dasgupta et al., 2002). The rapid growth
inevitably results in greater use of natural resources and emission of pollutants,
which in turn put more pressure on environment. People are too poor to pay for
abatement, and/or disregard environmental consequences of growth. In later stage
of industrialization, as income rises, people value the environment more, regulatory
institutions become more effective and pollution level declines. Thus, EKC
hypothesis posits a well-defined relationship between level of economic activity and
environmental pressure (defined as the level of concentration of pollution or flow of
emissions, depletion of resources, etc.). An Environmental Kuznets Curve reveals
how a technically specified measurement of environmental quality changes as the
fortunes of a country or a large human community change. In brief, Environmental
Kuznets Curves are statistical artifacts that summarize a few important aspects of
collective human behaviour in two-dimensional space. The EKC hypothesizes an
inverted-U-shaped curve when pollution indicators are plotted against income per
capita.
The EKC results have shown that economic growth could be compatible with
environmental improvement if appropriate policies are taken. It is a significant
condition that only when income grows, the effective environmental policies can be
implemented.1 Clearly, before adopting a policy, it is important to understand the
nature and causal relationship between economic growth and environmental
quality (Coondoo and Dinda, 2002). Therefore the relevant question is: Can
economic growth be part of the solution rather than the cause of environmental
problem? This has been the primary motivation for empirical studies on EKC
searching for evidence of link between income and environmental degradation. It has
provoked a vast empirical research over the last decade (i.e., 1990s). The 1990s
have seen the advent of EKC hypothesis and an explosion of studies that tested it
for several pollutants. The aim of the present paper is not to go further on these
issues, but to visualize the current state of knowledge about the EKC. Stern
(1998), Ekins (1997), de Bruyn and Heintz (1998) and Stagl (1999) provide good
overviews and comparisons. This EKC-Review is slightly different from earlier
reviews and here the literature added since then is taken into consideration.
The second section of this paper provides the background history of the
environment–economic growth debate and genesis of the EKC; the third section
provides a general idea and some conceptual insights and the fourth section deals
with theoretical reviews. Empirical evidences have been reviewed in the fifth section,
policy implication in the sixth section, and a conceptual and methodological critique
has been presented in the seventh section. Finally, the paper concludes with some
remarks for direction of future research.
2. Background history of EKC
2.1. Growth controversy
The origin of the EKC debate is the growth controversy and related policies.
Researchers hypothesize that a higher level of income increases environmental
degradation. Actually, higher levels of income may reduce environmental
degradation (Beckerman, 1992), and thus, economic growth may be a precondition
for environmental improvement (Bhagawati, 1993). So, growth could be a powerful
way for improving environmental quality in developing countries (Panayotou, 1993).
The argument according to which economic growth is ultimately beneficial for
environment is, however, controversial2 since it prompts the idea of a development
path,3 a stage-based link between environmental quality and economic growth.
Truly, the relationship between economic growth and environmental quality has been
an object of a long debate for many years. Before 1970, there was a belief that the
consumption of raw materials, energy and natural resources grow almost at the
same rate (viz., steady state) as economy grows. In the early 1970s, the Club of
Rome's Limits to Growth view (Meadows et al., 1972) was forwarded about the
concern for availability of natural resource of the Earth. The environmental
economists of the Club of Rome argued that the finiteness of environmental
resources would prevent economic growth and urged for a steady-state economy
with zero growth to avoid dramatic ecological scenarios in the future. This view has
been criticized on both theoretical and empirical grounds. Empirical works show that
the ratio of consumption of some metals to income was declining in developed
economies during the 1970s, which conflicts with the predictions set out in the Limits
to Growth view (Malenbaum, 1978). This view induced to examine the relationship
between the intensity of metal use and income, and an inverted-U curve was found.
This inverted-U curve (known as intensity-of-use hypothesis (Auty, 1985)) reveals
that intensity of materials-use4 decreases beyond a threshold level of
income Canas et al., 2003 ; de Bruyn and Heintz, 1998.
From the beginning of the 1990s, empirical data on various pollutants become
available through the Global Environmental Monitoring System (GEMS), the
environmental data compendium of the OECD, the CO2 emission estimates from the
Oak Ridge National Laboratory (ORNL), etc. These data availability induce several
authors to test the validity of the inverted-U curve hypothesis for income and
environmental quality indicators. The first empirical study appears in the NBER
working paper by Grossman and Krueger (1991); after that, a number of studies
follow.

2.2. Genesis of EKC

Kuznets (1955) predicted that the changing relationship between per capita income
and income inequality is an inverted-U-shaped curve. As per capita income
increases, income inequality also increases at first and then starts declining after a
turning point (TP). In other words, the distribution of income becomes more unequal
in early stage of income growth and then the distribution moves towards greater
equality as economic growth continues (Kuznets, 1955). This relationship between
income per capita and income inequality can be represented by a bell-shaped curve.
This observed empirical phenomenon is popularly known as the Kuznets Curve.
In the 1990s and onwards, the Kuznets Curve took on a new existence. There is
evidence that the level of environmental degradation and per capita income follows
the same inverted-U-shaped relationship as does income inequality and per capita
income in the original Kuznets Curve. Now, Kuznets Curve has become a vehicle for
describing the relationship between measured levels of environmental quality (for
example, concentration of SO2) and per capita income. This inverted-U-shaped
relationship between economic growth and measured pollution indicators
(environmental quality) is known as the EKC.
First set of empirical EKC studies appeared independently in three working papers:
an NBER working paper as part of a study of the environmental impacts of
NAFTA (Grossman and Krueger, 1991), the World Bank's 1992 World Development
Report (Shafik and Bandyopadhyay, 1992) and a Development Discussion paper as
part of a study for the International Labour Organisation (Panayotou,
1993). Grossman and Krueger (1991) in an NBER working paper, which was later
published in 1993 (Grossman and Krueger, 1993), first pointed out an inverted-U
relationship between pollutants (SO2 and smoke) and income per capita. Kuznets'
name was attached to the inverted-U relationship between pollution and economic
development later due to its resemblance to Kuznets' inverted-U relationship
between income inequality and economic development. However, Panayotou
(1993) first coined it as the Environmental Kuznets Curve or EKC.

3. Conceptual background of EKC

3.1. General idea
Corresponding to the early stage of economic growth,5 the awareness of
environmental problems is low or negligible and environment friendly technologies
are not available.
Environmental degradation increases with growing income up to a threshold level
beyond which environmental quality improves with higher income per capita. This
relationship can be shown by an inverted-U-shaped curve (see Fig. 1). It is described
as the EKC following the observation of Kuznets (1955). This EKC hypothesis is
intended to represent a long-term relationship between environmental impact and
economic growth. As economic development accelerates with the intensification of
agriculture and other resource extraction, at the take-off stage, the rate of resource
depletion begins to exceed the rate of resource regeneration, and waste generation
increases in quantity and toxicity. At higher levels of development, structural change
towards information-intensive industries and services, coupled with increased
environmental awareness, enforcement of environmental regulations, better
technology and higher environmental expenditures, results in leveling off and gradual
decline of environmental degradation. As income moves beyond the EKC turning
point, it is assumed that transition to improving environmental quality starts. Thus, it
could be a depiction of the natural process of economic development from a clean
agrarian economy to a polluting industrial economy, and, finally, to a clean service
economy (Arrow et al., 1995).

Fig. 1.
Environmental Kuznets Curve.
Figure options
3.2. Explanations for the EKC
The EKC hypothesis actually summarizes an essentially dynamic process of change
—viz., as income of an economy grows over time, emission level grows first, reaches
a peak and then starts declining after a threshold level of income has been crossed.
However, the statement of the hypothesis makes no explicit reference to time. Truly,
the EKC is a long run phenomenon. In other words, it is a development trajectory for
a single economy that grows through different stages over time. That is, ceteris
paribus, in their process of development, individual countries experience income and
emission situations lying on one and the same EKC. Empirically, this development
trajectory can be observed in cross-country cross-sectional data, which represents
the countries with different (low, middle and high) income groups (of the world)
corresponding to their emission levels. Assuming all countries follow one EKC, then
at any cross-section of time, it should be observed that some countries are poor
shaping the initial stage of EKC, some are developing countries approaching
towards peak or start to decline and other are rich produce falling stage of EKC.
Evidently, thus, under the null hypothesis of EKC and under the assumption of
invariance of the income–emission relationship, for a given set of cross-country
cross-sectional data on income and emission, the emission on income regression
line should be an inverted-U-shaped empirical EKC.
Several factors are responsible to shape the EKC. Considering other things remain
constant, i.e., ceteris paribus, each factor is analyzed in the following sub-sections
one by one to explain the EKC.

3.2.1. Income elasticity of environmental quality demand

As income grows, people achieve a higher standard of living and care more for the
quality of environment they live in and demand for better environment induces
structural changes in economy that tends to reduce environmental degradation. The
most common explanation for the shape of an EKC is the notion that when a country
achieves a sufficiently high standard of living, people attach increasing value to
environmental amenities Pezzey, 1989; Selden and Song, 1994 ; Baldwin, 1995.
After a particular level of income, the willingness to pay for a clean environment rises
by a greater proportion than income (Roca, 2003). This will be reflected through
defensive expenditures, donations to environmental organizations or choice of less
environmentally damaging products. Thus, rich people value the clean environment
and preserve it. Generally, it is recognized that income elasticity of environmental
quality demand and resource goods is in excess of unity, i.e., clean environment and
preservation are ‘luxury goods’. But major indicators of environmental degradation
are monotonically rising in income though the income elasticity is less than one and
is not a simple function of income alone. However, most of the EKC models have
emphasized the role of income elasticity6 of environmental quality
demand Beckerman, 1992; Carson et al., 1997; Chaudhuri and Pfaff, 1998 ;
McConnell, 1997 and this elasticity is often invoked in the literature as the main
reason to explain the reduction of emission level. An adequate explanation of
observed EKC relationships for some pollutants7 are consistent with the high-income
elasticity of environmental quality demand McConnell, 1997 ; Shafik, 1994. Poor
people have little demand for environmental quality, however, as a society becomes
richer, its members may intensify their demands for a more healthy and cleaner
environment. The consumers with higher incomes are not only willing to spend more
for green products but also create pressure for environmental protection and
regulations. In most cases where emissions have declined with rising income, the
reductions have been due to local and national institutional reforms, such as
environmental legislation and market-based incentives to reduce environmental
degradation.

3.2.2. Scale, technological and composition effects

Economic growth affects the quality of environment in three different channels—
viz., scale effects, technological effects and composition effects (Grossman and
Krueger, 1991). Increasing output requires more input and thus more natural
resources are used up in production process. More output also implies more wastes
and emissions as by-product, which also contributes to degrade environmental
quality. Economic growth, thus, exhibits a scale effect that has a negative impact on
environment. However, economic growth has also a positive impact on environment
through a composition effect: As income grows, structure of the economy tends to
change and gradually increases cleaner activities that produce less pollution.
Environmental degradation tends to increase as structure of the economy changes
from rural to urban or agricultural to industrial, but it starts to fall with another
structural change from energy intensive industry to services and knowledge based
technology-intensive industry. As a wealthy nation can afford to spend more on
R&D (Komen et al., 1997), technological progress occurs with economic growth and
the dirty and obsolete technologies are replaced by upgraded new and cleaner
technology, which improves environmental quality. This is the technique effect of
economic growth. The EKC suggests that the negative impact on environment of the
scale effect that tends to prevail in initial stages of growth, but it will eventually be
outweighed by positive impact of the composition and technique effects 8 that tend to
lower the emission level (Vukina et al., 1999).

3.2.3. International trade

International trade is one of the most important factors that can explain EKC. Trade
leads to increase in size of the economy that increases pollution, thus, trade is the
cause of environmental degradation ceteris paribus. But many economists have long
argued that trade is not the root cause of environmental damage Birdsall and
Wheeler, 1993; Lee and Roland-Holst, 1997 ; Jones and Rodolfo, 1995. However,
free trade has the contradictory impacts on environment, both increasing pollution
and motivating reductions in it. Environmental quality could decline through the scale
effect as increasing trade volume (especially export) raises the size of economy,
which increases pollution. On the other hand, trade can improve the environment
through composition effect and/or technique effect (i.e., as income rises through
trade, environmental regulation is tightened that spurs pollution reducing innovation).
The pollution from the production of pollution-intensive good declines in one country
as it increases in other country via international trade. This composition effect is
attributed to two related hypotheses: Displacement Hypothesis and Pollution Haven
Hypothesis. Fundamentally, these two hypotheses have no difference. These
hypotheses are basically the same with respect to comparative advantage in
international trade. As trade relates one country with international communities, one
underdeveloped economy may rely on technology transfer through foreign direct
investment (FDI) that may reduce pollution.

[Link]. Displacement Hypothesis:

The alleged emergence of structural change in production has been linked with
consumption and international trade Arrow et al., 1995; Stern et al., 1996; Ekins,
1997 ; Rothman, 1998. The changes in the structure of production in developed
economies are not accompanied by equivalent changes in the structure of
consumption, therefore, EKC actually records displacement of dirty industries to less
developed economies. Under certain circumstances, the pollution intensive
industries migrate from countries with stronger environmental regulations to those
with weaker regulations (Copeland and Taylor, 1995). The composition of
international trade, however, actually reflects the energy consumption of a
country (Agras and Chapman, 1999), and countries that export more manufactured
goods tend to have a higher energy consumption (Suri and Chapman, 1998). Poor
countries are likely to be net exporters and rich countries to be net importer of
pollution-intensive goods (Saint-Paul, 1994). The observed inverted-U curves may
be the result of changes in international specialization. That means, poor countries
are concentrated in ‘dirty’ and material intensive production while richer countries
specialize in ‘clean’ and service intensive production, without altering consumption
patterns Cole et al., 2000; Janicke et al., 1997 ; Stern et al., 1996. This is true only
when environmental effects are being displaced from one country to another, rather
than reduced. These observations are consistent with the Displacement Hypothesis.
The Displacement Hypothesis expects that trade liberalization or
openness (Harrison, 1996) will lead more rapid growth of pollution-intensive
industries in less developed economies as developed economies enforce strict
environmental regulations9Rock, 1996 ; Tobey, 1990.
The composition effect and the displacement effect seem not to be independent. So
far, as the composition effect is due to displacement, later developing countries will
not be able to derive benefit from it, for lack of other countries to which
environmentally intensive activities can be displaced.

[Link]. Pollution Haven Hypothesis:

Free trade can be good for environment Antweiler et al., 2001 ; Liddle, 2001. Trade
raises income levels of people in developing countries, and by raising real incomes,
it will create demands for tighter environment protection because higher income
individuals want a cleaner environment. But lower trade barriers could hurt
environment if heavy polluters move to countries with weaker regulations.
Economists call this the Pollution Haven Hypothesis (PHH). The PHH refers to the
possibility that multinational firms, particularly those engaged in highly polluting
activities, relocate to countries with lower environmental standards.10 The PHH
argues that low environmental standards become a source of comparative
advantage, and thus shifts in trade patterns. The PHH is basically a theory that
suggests that high regulation countries will lose all the ‘dirty industries’ and poor
countries will get them all.

[Link]. Foreign direct investment:

Developing countries can be said to provide a ‘pollution haven’ if they set
environmental standards below their efficiency levels in order to attract foreign
investment. Most of the developing countries rely on technology transfer through
foreign direct investment from developed countries as a primary means of
technology acquisition.11 These clean and upgraded technologies will reduce
pollution level. However, recent increased global eco-consciousness and linking of
trade and investment with environmental issues has the potential of disrupting these
investments flow.12

[Link]. Race to bottom:

In a race to bottom scenario, relatively high environmental standards in developed
economies impose high costs on polluters. So, polluting activities in high-income
economies face higher regulatory costs than their counterparts in developing
countries Jaffe et al., 1995 ; Mani and Wheeler, 1998. This creates an incentive for
at least some highly polluting industries13 to relocate and thereby international capital
reallocations take place. Rising capital outflows force governments in high-income
countries to begin relaxing environmental standards. As the race to bottom
accelerates, the EKC flattens and rises toward higher existing level of pollution.

[Link]. Diffusion of technology:

With international trade, technological innovation is more important than in a closed
market economy. Developed countries must continually innovate, not just to grow but
even to maintain their real incomes.14 Diffusion of technology prevents economic
latecomers from requiring the same levels of materials and energy inputs per unit of
GDP than older industrialized countries needed in past. International trade enhances
diffusion of clean technology Martin and Wheeler, 1992 ; Reppelin-Hill, 1999. Some
authors have suggested that this might allow developing countries to ‘dive through’
the EKC.

[Link]. International assistance:

International communities15 also play an important role in lowering and flattening EKC
by financing for appropriate training, policy reforms, information collection and public
environmental education. Their aided research programmes provide easily
accessible information about polluters, pollution damages, local environmental
quality, cost of pollution abatement, stronger regulatory institutions, cost-effective
measures, etc., should help to reduce pollution (Dasgupta et al., 2002).

[Link]. Globalization:
Globalization could trigger the environmental ‘race to bottom’ (Wheeler, 2000), in
which competition increases for investment and jobs. In fact, ‘the bottom’ rises with
economic growth. Poor economies improve their environmental quality as investment
increases income and employment. So, globalization is compatible with pollution
reduction Dessus and Bussolo, 1998; Grether and Melo, 2002 ; Robinson, 1988.
Economic globalization16 is a driving force for global economic growth, yet, opinion is
divided about the benefits of this process (Tisdell, 2001). This global, liberal, open
economy raises the issue of potential conflicts between two powerful current trends
—one, the worldwide acceptance of market oriented economic reform process, and
another is environmental protection.

3.2.4. Market mechanism

An argument World Bank, 1992 ; Unruh and Moomaw, 1998 that the existence of an
endogenous ‘self-regulatory market mechanism’ for those natural resources that are
traded in markets might prevent environmental degradation from continuing to grow
with income has been suggested. Economic development may strengthen the
market mechanism such that a developing economy may gradually shift from non-
market to market energy resources that are less polluting (Kadekodi and Agarwal,
1999).

[Link]. Role of price:

The early stages of growth are often associated with heavy exploitation of natural
resources due to relative importance of the agricultural sector. This tends to reduce
the stock of natural capital over time. Efficiency in use of natural resources increases
after a certain stage of development has been reached, as markets for
environmental resources develop and prices begin to reflect the value of natural
resources. The consequent increase in the price of natural resources reduces their
exploitation at later stages of growth as well as environmental degradation
associated with it. Moreover, higher prices of natural resources also contribute to
accelerate the shift toward less resource-intensive technologies (Torras and Boyce,
1998). The rising oil price during the 1970s promoted shift to alternative sources of
electricity power production (Unruh and Moomaw, 1998). Hence, not only induced
policy interventions, but also market signals may explain the shape of EKC.

[Link]. Role of economic agents:

Among other things, the relationship between economic growth and environmental
quality will be determined by the way economic agents (including citizens,
businesses, policy makers, regulators, non-government organizations and other
market participants) react to economic growth and its side effects. Market agents can
also play an important role in creating pressures for environmental protection. For
example, bankers may refuse to advance credit because of the environmental
liabilities; consumers may avoid products known to be heavy polluters. Evidence
suggests that capital markets also play an important role in encouraging cleaner
products Dasgupta et al., 2001a; Dasgupta et al., 2001b; Gupta and Goldar, 2003 ;
Lanoie et al., 1998. Heavy emissions may also give signal to investors about firm's
production techniques, which are inefficient (Lanoie and Laplante, 1994). The news
related to environmental damage due to firm's production activities affect the stock
prices Hamilton, 1995 ; Dasgupta et al., 2001a and subsequently such
environmental news may help to reduce emissions (Konar and Cohen, 1997) as
shareholders discourage it and also create pressure to adopt new technology.
Shareholders of high-income countries drive heavy polluting firms to relocate to low-
income countries (Levinson, 1996), and thus, investors also encourage clean
production.

[Link]. Transition to market economy:

A country's transition from a centrally planned to a market-driven economy, or, in
theory at least, transition from complete market failure to less market failure is
consistent with an overall improvement in environmental quality. The environment in
the transitional economies is cleaned up quickly because of rising energy prices and
penalizing of energy-intensive activities Nilsson, 1993 ; Vukina et al., 1999.

[Link]. Information accessibility:

Degree of competition in the market depends on the information about the product
quality and production process. Given the stock nature of many pollution problems,
emissions only partially account for the environmental impacts. Other than economic
growth, several other variables like income distribution, education, information
accessibility, etc., may also help to determine environmental quality (Bimonte, 2002).
Social policy decision heavily depends on information accessibility corresponding to
the position of economy as well as that of environmental quality. Thus, the
information accessibility may play a vital role to curve down the pollution level
through proper regulations.

3.2.5. Regulation
[Link]. Formal regulation:
Pollution grows unless environmental regulation is strengthened (Hettige et al.,
2000a). With economic growth, economies advance with their social institutions that
are essential to enforce environmental regulation (Dasgupta et al., 2001b).
Developing countries are moving, now, from command-and-control policies to
market-oriented forms of regulation Dasgupta et al., 2002; Panayotou, 1999 ;
Vukina et al., 1999. Information about polluters, damages, local environmental
quality, abatement, etc., significantly improve the ability of regulators to enforce
environmental standards. Market agents also reward clean firms and punish heavy
polluters. Environmental regulatory institutions are either weak or absent in less
developed countries. In this situation, pollution can be reduced if these poor
countries focus on few sources, which are responsible for most of the
pollution (Hettige et al., 1995). So, targeting regulatory monitoring and enforcement
on those dominant sources can significantly reduce emissions.

[Link]. Informal regulation:

When formal regulation is weak or absent, societies often use other channels to
induce pollution abatement by local factories through a process of ‘informal
regulation’. The resulting ‘pollution equilibrium’ reflects the relative bargaining power
of the community and the plant (Pargal and Wheeler, 1996). For example, Agarwal
et al. (1982) describe a situation where confronted by community complaints a paper
mill in India installed pollution abatement equipment and also compensated residents
for repairing the damage caused. Non-Governmental Organizations (NGOs) and
social groups (including religious institutions, social organizations and politicians)
may pursue informal regulation17Dasgupta et al., 2002 ; Afsah et al., 1996.
Evidences18 from Asia and Latin America show that neighbouring communities can
strongly influence factories' environmental performance. Actually, informal pressure
has to be highly localized. A proactive vernacular media is one such localized
informal regulation that can easily trigger formal regulations19 that reduce emission
level. So, the design of policy instruments for industrial pollution in the case of
developing countries is very challenging20(Xu, 1999). Thus, in principle, the regulator
has an array of physical, legal, monetary and other instruments such as property
rights.

[Link]. Property rights:

Most of the resource base may be treated as a commons in primitive societies. With
growing scarcity, times come when some aspects of the commons become defined
as private property. Private property is the most incentive-enriched form: Individuals
have greater incentive to manage, to conserve and to accumulate wealth that can be
traded or passed to future generations. The economic progress is determined partly
by the extent to which environmental assets are protected by private property
rights21Chichilinsky, 1994 ; Lopez, 1994. Countries with a high degree of private
ownership and proper allocation of property rights have more efficient resource
allocation, which help to increase income and decrease environmental
problems (Cropper and Griffiths, 1994). A new approach to the EKC relationship is
adopted to incorporate policy consideration (Panayotou, 1997). Policies related to
secure property rights under a rule of law and better enforcement, and effective
environmental regulations can help flatten the EKC. Thus, the EKC may be a proxy
for a property rights model that begins with a commons and ends with private
property rights.

4. Theoretical analysis of EKC

The conceptual arguments make the EKC conceivable from a theoretical viewpoint.
Recently, the EKC has been explained theoretically. Income growth is driven by
accumulation of production factors (Lopez, 1994), which increases firms' demand for
polluting inputs. At the same time, demand for environmental quality rises with
income as the willingness to pay for a clean environment increases. A basic
comparative static analysis of the costs and benefits associated with a better
environmental quality provides an interesting conceptual insight as to how the EKC
might emerge. The Environmental Kuznets Curve is derived from the interaction
points of marginal cost (MC) and marginal benefit (MB) curves (Munasinghe, 1999).
An EKC can be derived directly from the technological link between consumption of
a desired good and abatement of its undesirable byproduct22(Andreoni and Levinson,
2001). It is also consistent with either Pareto efficient policy or a decentralized
market economy. If pollution is not priced, firm will use it until its marginal product is
zero, when pollution is considered as a factor of production, but not the stock of
environmental capital. Extending this model, stock of environmental quality is
included as a factor of production (Lopez, 1994), then the predictions of this model
depend crucially on the existence of property rights. The EKC emerges from a
dynamic process, as one part of capital goes for development of the environmental
sectors. Total capital is divided into two parts—one is used in production process
that creates pollution and damage the existing environment and the other is used to
clean up environment or improve it (Dinda, 2002). The role of abatement expenditure
is crucial to reduce the pollution in production side Dessus and Bussolo,
1998; Jaeger, 1998 ; Selden and Song, 1994. But the abatement expenditure may
not be a determining factor behind the EKC for long-lived pollutants like hazardous
waste sites that are neither easily abated nor shifted elsewhere. A stylized
theoretical model of the EKC based on perfect mobility of household and labour is
developed, and a general equilibrium model that emphasizes spatial separation on
the consumer side as the reason behind the EKC for hazardous waste
sites23(Gawande et al., 2001). Under various conditions, the EKC relationship
between pollution and income can be obtained theoretically Beltratti, 1997; Bulte and
van Soest, 2001; Dinda, 2002; John et al., 1995; Jones and Rodolfo, 1995; Kadekodi
and Agarwal, 1999; Selden and Song, 1995 ; Stokey, 1998.24 It should be noted that
the EKC relation may also take shape from the interaction between ecological and
economic factors (Ezzati et al., 2001).
4.1. Empirical evidence for EKC
The empirical evidence for the existence of an EKC has been found in various
studies. These studies share some common characteristics with respect to the data
and methods employed. Most of the data used in these studies are cross-sectional
panel data. The following reduced form model is used to test the various possible
relationships between pollution level/environmental pressure and income:
equation(1)

where y is environmental indicators, x is income and z relates to other variables of

influence on environmental degradation. Here, the subscript i is a country, t is
time, α is constant, βk is the coefficient of the k explanatory variables. Model
(1) provides us to test several forms of environment–economic development/growth
relationships:
(i)
β1=β2=β3=0. A flat pattern or no relationship between x and y.
(ii)
β1>0 and β2=β3=0. A monotonic increasing relationship or a linear relationship
between x and y.
(iii)
β1<0 and β2=β3=0. A monotonic decreasing relationship between x and y.
(iv)
β1>0, β2<0 and β3=0. An inverted-U-shaped relationship, i.e., EKC.
(v)
β1<0, β2>0 and β3=0. A U-shaped relationship.
(vi)
β1>0, β2<0 and β3>0. A cubic polynomial or N-shaped figure.
(vii)
β1<0, β2>0 and β3<0. Opposite to the N-shaped curve.
From these, we observe that the EKC is only one of the possible outcomes of model

(1). From (iv), the TP of EKC is obtained at .

A large number of econometric studies have used the model (1)25 to test for the
emergence of an EKC in a wide variety of income based environmental
pressure/pollution levels.

4.2. Empirical findings

The empirical analyses are based on data for various sources. Most of the data used
in empirical tests are drawn from cross-sections of countries, cross-sectional panel
data and pooled data. Most of the studies have used water and air pollution data
from GEMS, ORNL (CO2), World Resources, UN Statistical Yearbook, compendium
of the OECD, FAO Production Yearbook, WHO's Health database, IEA, EPA for US
data, different sources for micro-data, etc. Economic data (GDP per capita, trade,
etc.) are taken mostly from the Penn World Tables (Summers and Heston) or the
World Bank. Using these data, several authors study the EKC hypothesis and their
empirical evidences provide controversy about it. In the absence of a single
environmental indicator, it is possible to distinguish three main categories that have
been used in the literature: air quality, water quality and other environmental quality
indicators.

4.2.1. Air quality indicators

The urban or/and local air quality indicators (SO2: sulphur dioxide, SPM: suspended
particulate matters, CO: carbon monoxide and NOx: nitrous oxides, etc., directly
affect human health) generally reveal the inverted-U relationship with income.
Several studies26 confirm this outcome. Generally, the literature does not find the
evidence of EKC for air pollutants that have direct little impact on health. Both early
and recent studies find that the global pollutants (such as carbon dioxide emissions)
either monotonically increase or decrease as income grows.

4.2.2. Water quality indicators

For water quality indicators, empirical evidence of EKC is even more mixed. Three
main categories of indicators are used as measures of water quality: (a)
concentration of pathogens in water (fecal and total coliforms), (b) amount of heavy
metals (lead, cadmium, mercury, arsenic and nickel) and toxic chemicals discharge
in water by human activities and c) measure of deterioration of the water oxygen
regime (dissolved oxygen, biological and chemical oxygen demand, i.e., BOD and
COD). There is evidence of EKC for some indicators, but many studies reach
conflicting results about the shape and peak of the curve Beede and Wheeler, 1992 ;
Hettige et al., 2000b. Several authors find evidence of N-shaped curve for some
indicators (for example, fecal coliforms in river water, see Shafik, 1994).

4.2.3. Other environmental indicators

Some other environmental indicators (municipal solid wastes, urban sanitation,
access to safe drinking water, energy use and traffic volumes, etc.) have been used
to test the EKC hypothesis. Most of these indicators do not support EKC. All studies
find that environmental problems having direct impact on human health (such as
access to urban sanitation and clean water) tend to improve steadily with economic
growth. On contrary, when environmental problems can be externalized (as in the
case of municipal solid wastes) curve does not even fall at high-income levels. The
empirical evidence of EKC is controversial in case of deforestation Bhattarai and
Hammig, 2001; Bulte and van Soest, 2001 ; Koop and Tole, 1999.

4.2.4. Turning point

It is clear that the EKC-type relations exist for some environmental pressure factors
and a transition is expected at a crucial point, i.e., turning point. The turning points of
these inverted-U-shaped relationships vary for different pollutants or environmental
indicators.27 For most of the pollution indicators, the estimated turning point lies within
the income range of US$3000–10,000 (at a constant price, 1985 US dollar).
Moreover, there are also large variations across studies for same indicators.
Economic growth may be associated with worsening environmental conditions in
less developed or poor countries but air and water quality appears to be benefited
from economic growth if the critical level of income has been reached. Several
pollution indicators, such as SO2, NOx, CO, CO2, SPM and air toxic emission matters;
oxygen regime in river basins (BOD, COD), fecal contamination of river water, heavy
metals in water (mercury, arsenic, cadmium, nickel, lead); hazardous28 and municipal
waste, deforestation Bhattarai and Hammig, 2001 ; Koop and Tole, 1999, etc.; have
been used to study the EKC relation. These studies assume that each country
should follow EKC with same shape but level of the curve may vary across countries
as per their economic position. The social and political factors are also crucial for
shaping the EKC.

4.2.5. A meta-analysis
However, various EKC studies have employed different methods, evaluated several
environmental indicators and used different data, resulting in a broad spectrum of
findings and leading to sometimes conflicting interpretations. It is important to use
meta-analysis to synthesize the EKC literatures. A meta-analysis is a statistical
method of synthesizing results of similar empirical studies to determine whether
credible conclusions about prior study results can be made. Methodological choices
and pollutant types affect the estimated income turning point (Cavlovic et al., 2000).

4.3. Important lessons from the EKC studies

The EKC's paradoxical outcome inspired a large amount of research. A number of
important lessons for the EKC debate are already emerging from the literature.

4.3.1. Local versus global pollution

The EKC relationships are more likely to hold for certain types of environmental
damage, e.g., pollutants with more short-term and local impacts, rather than those
with more global, indirect and long-term impacts Arrow et al., 1995; Cole et al.,
1997 ; John and Pecchenino, 1994. The significant EKCs exist only for local air
pollutants like SO2, SPM, NOx and CO (Cole et al., 1997), and urban air
concentrations with a peak at lower income levels than total per capita
emissions (Selden and Song, 1994). In contrast, the global environmental indicators
(indirect impact) like CO2, municipal waste, energy consumption (Horvath, 1997) and
traffic volumes, either increase monotonically with income or have high turning points
with large standard errors (Holtz-Eakin and Selden, 1995).

4.3.2. The role of national and local policy

Most of the EKC studies have concluded that income–environmental degradation
relationship is likely to be affected significantly by national and local policies ceteris
paribus. Several studies in this issue have attempted to estimate the influence of
policy explicitly. The strong policies and institutions in the form of more secure
property rights, better enforcement and effective environmental regulations can help
to ‘flatten’ the EKC (Panayotou, 1997). In case of the Netherlands and West
Germany, the impact of technological change in reducing SO2 emissions is largely
attributable to the installation of better end-of-pipe (EOP) abatement technology,
which is in turn related to tougher environmental policy and regulation (de Bruyn,
1997). As income level rises, public spending on environmental research and
development also increases. These R&D spending may not directly account for
greater environmental improvement but also act as a catalyst for private spending on
development of cleaner technologies (Komen et al., 1997). The income of a country
may be significant in determining the ‘zeal and effectiveness’ of its air pollution
regulatory structure. Mainly because a richer state is likely to have more resources
available to regulatory agencies, higher public preferences for improved air quality
and a greater perceived danger from emission (Carson et al., 1997).

4.3.3. Country specific effects

A more fruitful approach to the analysis of the relationship between economic growth
and environmental impact would be the examination of historical experience of
individual countries, using econometric and also qualitative historical analysis (Stern
et al., 1996). There is a large difference in state level per capita emissions due to the
enforcement of federal pollution laws and possibly employment of outdated industrial
technology in some states of the USA Carson et al., 1997; List and Gallet, 1999 ;
Selden et al., 1999. The increasing relationship between SPM and income in
Malaysia may be due to the fact that low-income states are still sources of emissions
because of land conversion through burning and replanting of tree crops, while high-
income states are emitting increasing emissions because of industrial and municipal
wastes (Vincent, 1997). Rapid urbanization and industrialization, which are
correlated with rising income in Malaysia, are responsible for the increasing
concentrations of ammoniac nitrogen and PH in water, as expansion of municipal and
industrial sewage treatment has lagged behind (Vincent, 1997).
The sources of EKC are summarized into two major groups: (a) structural change
and (b) technological progress.

4.3.4. Structural change

Several authors have attempted to explore empirically which structural factors are
responsible for EKC. The scale and the composition of economic activity,
and techniques of production Grossman and Krueger, 1991; Vukina et al., 1999 ;
Xiaoli and Chatterjee, 1997, which may lend explanatory power to the observed
relationships between income levels and measures of environmental impacts.
Although structural change is a very intuitive notion, empirical evidence is found for
the impact of difference in the structure of production on toxic manufacturing
emissions (Lucas et al., 1992). Several authors have tried to explain the downward
segment of EKC in different ways.

[Link]. Production structure:

Developed countries have fairly stable production structures, whereas rapidly
industrializing and developing countries have unstable production structure and the
effects of structural change on emissions may be less obvious. In comparison,
structural change is less important than technological innovation, represented by the
change in emission intensity across sectors, in explaining declining SO2 emissions in
the Netherlands and West Germany (de Bruyn, 1997). Structural changes have not
been a dominant factor in reduction of SO2 emissions in either country, at least
during the 1980s. The changes in production structure in developed economics are
not accompanied by equivalent changes in composition of production. The
hypothesis of spatial displacement of environmental impacts and empirical
evidences also reflect the composition of consumption instead of production. A
change in the composition of consumption has resulted in a downward turn in
pollutants (Rothman, 1998).

[Link]. Migration:
The solution of environmental problems associated with growth must mean more
than passing them off to people in other time and places. It can be speculated that
improvements in environmental quality may in reality be indicators of increased
ability of consumers in wealthy nations to distance themselves from environmental
degradation associated with their consumption. To extend this speculation,
mechanisms for such distancing might include both moving polluting sources (viz.,
flow pollutants which is emphasized by Rothman, 1998) and selected households
moving away from pollution concentration (viz., stock pollutant which is the study
of Gawande et al., 2000). Considering general hypothesis of ‘distancing’ as a
possible source of EKC results in which internal migration plays a central
explanatory role for an observed EKC for hazardous waste sides Gawande et al.,
2000; Gawande et al., 2001 ; Wang et al., 1998.29 Different social groups are
differentially able to migrate away from areas with critical build-ups of hazardous
waste sites, then a migration mechanism is likely to be a source of increasing
environmental inequality. Thus, migration is an important factor behind an EKC.

[Link]. Share of GDP:

A high share of manufacturing in total GDP is associated with higher levels of energy
consumption. The importance of trade in combination with composition of economic
activity is investigated in the decomposition of EKC for SO2 concentrations across
countries (Kaufmann et al., 1998). The effect of shifts in the sectoral structure of
economy (Panayotou, 1997) can be represented by industry's share of
GDP Dinda et al., 2000 ; Friedl and Getzner, 2003. It should be noted that the
manufacturing share in developed economies starts to decline rapidly after oil crisis.

[Link]. External shock:

The oil crisis in the 1970s affects individual country's production. There is a positive
correlation between CO2 emission and income for the pre- oil shock period (i.e.,
before 1973) and a negative correlation for the post oil shock crisis (Unruh and
Moomaw, 1998). The EKC analyses is largely attributable to structural economic
transition, and a significant break in the positive CO2 emission–GDP correlation is
found only in 16 OECD countries (Moomaw and Unruh, 1997). It is clear from the
evidence that emission levels decline in every nation after the oil shock in the 1970s.

[Link]. Corruption:
The modified EKC analysis is also ready to allow for differences in EKCs between
countries due (for instance) to inter-country variations in the presence of corruption.
One of the determinants of environmental policy is the socio-political regime of a
particular country. Corruption and rent-seeking behaviour can influence the
relationship between income and environment (Lopez and Mitra, 2000). However, for
any level of per capita income, the pollution levels corresponding to corrupt
behaviour are always above the socially optimal level. So, the turning point of EKC
takes place at income and pollution levels above those corresponding to the social
optimum, which depends on the existing social institutions.

[Link]. Institutional change:

Along with economic development, societies advance with their social, legal and
fiscal infrastructures that are essential to enforce environmental regulation30(Bhattarai
and Hammig, 2001). Institutional changes triggered by citizens' demand for cleaner
environments are more likely to occur in democratic countries. The influence of
political and civil rights on these are better in more democratic countries (Shafik and
Bandyopadhyay, 1992). However, opposite results can be found when the samples
are divided into a subset of high- and low-income countries (Torras and Boyce,
1998). Most of the pollutants investigated in their study are substantially lower in
more democratic low-income countries. Population density causes an increase in
threatened species with the effect strongest in low-income countries. More species
are threatened where freedom (political rights and civil liberties) is
limited (McPherson and Nieswiadomy, 2001).31

4.3.5. Technological progress

Generally, technological progress leads to greater efficiency in the use of energy and
materials. Thus, a given amount of goods can be produced with successively
reduced burdens on natural resources and environment. One aspect of this progress
may be better and more efficient reuse and recycling of materials, which (coupled
with greater efficiency in use) can yield large resource savings.

[Link]. R&D:
As income grows, people can adopt better and efficient technology that provide
cleaner environment. This preferential behaviour of people should be reflected
through their income elasticity. The income elasticity of public research and
development funding for environmental protection is positive (Komen et al., 1997). It
is true for public expenditure on R&D for environmental protection in the case of 19
OECD countries over the period 1980–1994 (Magnani, 2000). This indicates the key
role of such public investments for environmental improvements in reducing
environmental degradation as income levels rise and even decreasing relationships
found for some pollution indicators in developed countries. The effect of economic
growth on pollution/emissions differs substantially among high-income countries.
Relative income32 and political framework in which policy decisions are taken
determine the emergence of downward sloping segment of EKC. This also depends
on the adoption of new technology.

[Link]. Innovation and adoption:

New technologies, unambiguously, improve productivity but create potential dangers
to the society such as new hazardous wastes, risk and other human problems.
These externalities are unknown in the early phase of diffusion of technology, in later
stages regulation becomes warranted to address it. Once the technology is
regulated, this may stimulate the gradual phase out of existing technology. So, a
cyclical pattern arises in technologies, which first diffuse, then become regulated and
finally are phased out by next generation of technologies (Smulder and Bretschger,
2000). Thus, an inverted-U shape can be observed with reference to each
technology. Since the pattern of innovation, income growth and pollution over cycles,
a sequence of Environmental Kuznets Curves emerge related to each technology.
This may produce an envelope of EKCs, which may be again an inverted-U- or N-
shaped or inverted-L curve (Dinda, 2003b). The Environmental Kuznets Curve
hypothesis is confirmed with empirical evidence for several pollutants. Earlier EKCs
studies provide that some pollutants follow N-shaped relationship with income, and
pollutants have different turning points. This implies that over a certain period during
which income grows, one pollutant may decline but another may rise due to adoption
of new technology.33

[Link]. Technological and organizational change:

Improved technology not only significantly increases productivity in the manufacture
of old products but also the development of new products. There is a growing trend
among industries to reconsider their production processes and thereby take
environmental consequences of production into account. This concerns not only
traditional technological aspects but also the organization of production as well as
the design of products. Technological changes associated with the production
process that may also result in changes in the input mix of materials and
fuels (Lindmark, 2002). Material substitution may be an important element of
advance economics (Labys and Wadell, 1989) that may result in lower
environmental impacts. The economy-wide reforms often contribute simultaneously
to the economic, social and environmental gains Anderson and Cavandish, 2001 ;
Pasche, 2002. The EKC approach seeks to relate the stages of economic
development of a country to that of environmental degradation. Developing countries
could learn from the experiences of industrialized nations, and restructure growth
and development to tunnel through (Munasinghe, 1999) any potential EKC—thereby
avoiding going through the same stages of growth that involve relatively high (and
even irreversible) levels of environmental harm.
However, it is not clear which effective environmental policies should encompass to
reduce pollution. Yet, virtually all of the studies that investigated EKCs have hinted at
the important policy implications of their work.

5. Policy implication for EKC

Now EKC has become standard fare in technical conversations about environmental
policy. Understanding the impact of economic growth on environmental quality is
becoming increasing important as environmental concerns are making their way into
main public policy agenda (Anderson and Cavandish, 2001). The policy implication
of EKCs is that promoting economic growth are sufficient criteria to safeguard the
environment. In the long run, the surest way to improve the environment is to
become rich34(Beckerman, 1992). But environmental policies may or may not be
implemented when economy develops (Shafik and Bandyopadhyay, 1992). There
are several points that impede a clear policy conclusion derived from the EKCs: Few
questions are raised regarding EKC related policy, such as: (i) Is EKC valid for all
types of environmental pressure? (ii) Is EKC permanent? (iii) Is EKC valid both for
individual countries and the World? and, lastly, (iv) Does EKC follow a sustainable
development path? Positive answers to these questions would grant the EKC policy
relevance. Negative answers would indicate that the validity and policy relevance of
EKCs is partial—partial with respect to countries, indicators, time and cost-
effectiveness.

5.1. Is EKC valid for all types of environmental pressure?

Empirical evidences suggest that environmental problems may be solved at higher
levels of income only for some environmental quality indicators. This is true when
there is a direct link between environmental quality and human health
impacts (Gangadharan and Valenzuela, 2001). The EKC applies only to
environmental problems that are easy to solve and which are well documented and
well known. Most of the air pollutants (that have been investigated) are energy
related, such as SO2, NOx, SPM, CO and CO2. EKC is valid for SO2, CO emissions
and particulate matters, etc., other pollutants follow either monotonicity or N-shaped.

5.2. Is EKC permanent?

The EKC hypothesis assumes that the initial increases in environmental pressure
are temporary, but that the subsequent decreases in environmental pressure are
permanent. Only a few authors have questioned whether these observed decreases
could also be a temporary phenomenon due to technological limitation (Dinda et al.,
2000). The result would be an ‘N’-shaped curve.35 An upswing of EKC can be
explained by the difficulty of keeping up efficiency improvements (innovation) with
continuing growth of production. On an aggregated indicator of material and energy
throughput suggest that the second half of the 1980s most developed economies
have gone through a phase of re-linking their throughput with economic growth (de
Bruyn and Opschoor, 1997). The fact that re-linking cannot be found for pollutants
such as SO2, particulate matter and CO2 may reflect the continuing importance of
end-of-pipe solutions over more fundamental changes in the economy, such as
reducing throughput. Pollutants for which the end-of-pipe solution is costly may
follow a similar N-shaped pattern.

5.3. Is EKC valid both for individual countries and the world?
Generally, the EKC is estimated in a cross-section panel of countries. Such
estimates do not guarantee that over time individual countries will move along the
estimated relationship (de Bruyn et al., 1998). The results of panel countries and that
of individual or sub-sample countries vary widely Dijkgraaf and Vollebergh, 1998 ;
Stern and Common, 2001. Developed countries are often associated with lower
emission reductions but in developing countries, the environmental pressure
increases over time. Developing countries have not yet reached income levels high
enough to be able to derive their turning points. The worldwide emission prospects
are not optimistic as it might be expected on the basis of EKC results. According to
EKC hypothesis, the improvements in environmental quality are not attainable for the
majority of the world population that has the standards of living substantially below
the estimated turning points (Stern et al., 1996). Therefore, worldwide emissions are
expected to continue to increase due to economic growth (Selden and Song, 1994).

5.4. Does EKC follow a sustainable development path?

EKCs represent the patterns of flows of pollutants, whereas environmental impacts
are often characterized as a stock problem (Arrow et al., 1995). The EKC, therefore,
does not necessarily reflect a sustainable time path of pollution Dinda, 2003a; Ekins,
1998; Gruver, 1976 ; Zang, 1998. Maximum level of pollution depends on costs and
benefits of pollution abatement, which differ among countries. Differences in
absorptive capacities, social preferences and discount rates give rise to different
costs–benefits structures, which implies different optimal levels of pollution among
countries. This limits the policy relevance of an estimated collective turning point for
a whole sample of countries. There is no guarantee that the rising part and top of
EKC bypass ecological thresholds and sustainability constraints beyond which
environmental deterioration is irreversible Arrow et al., 1995 ; Panayotou, 1993.
5.5. Socio-political regime
Restructuring the environment may become unnecessarily expensive, and it may be
less costly to prevent or abort today than in future. Most of authors agree that
environmental policies are key determinants of the future path of income–
environment relationship. Actually, public preferences are reflected through
environmental quality related public policy that influence the relationship between
income and pollution. In other words, researchers have identified some demand-side
characteristics that influence the state's environmental policy regime, and they also
explained the mechanism through which these preferences are manifested.
Provision of public good, especially with regard to air and water quality, comes from
state because individuals of the society are unable to purchase abatement
technology directly. So, the environmental policy is a function of the preferences of
society. Actual levels of environmental quality depend on weights placed on various
heterogeneous societal preferences by policy makers, which can be generally
characterized as the policy regime. One major determinant of environmental policy is
the socio-political regime of a particular country. Corruption and rent seeking
behaviour may influence the income–environment relationship (Lopez and Mitra,
2000). A well-defined property rights, democratic voting systems and respect of
human rights can create synergies, which lead to increased levels and efficacy of
environmental policy36(Magnani, 2000).
Policies are generally formulated at national level and it is implemented at local
levels. These command-and-control policies are inefficient and ineffective because
policy makers suffer from lack of proper information about local environmental
damage. Local communities should properly protect their environment. The demand
for environmental protection therefore comes from local levels to national levels,
which thereby leads to global level. It is demand led policies that are emerging which
will actually rule the Future World.

6. A critique
The Environmental Kuznets Curve model has elicited conflicting reactions from
researchers and policymakers. The stakes in the EKC debate are high for both
developing and developed countries. It is clear that EKC can take shape from a
multiplicity of possible outcomes of economic development. So, proper attention is
required for multiple factors that form the economic–environmental system, rather
than a single dominant one (Ezzati et al., 2001). Since these factors are
interdependent, it is difficult to determine the factors that may dominate and govern
the shape of EKC. The uses of reduced form models,37 as explained above, deny any
insight into the underlying causes of EKCs. The lack of insight into the process that
causes pollution to curve downwards beyond a particular income level makes
designing of specific policy implications from an EKC difficult. The EKC analysis thus
has significant deficiencies. There are increasing grounds to be cautious about EKC
hypothesis.

6.1. A conceptual critique

As already mentioned, the inverted-U relation or EKC cannot be generalized for all
types of pollutants. There is little empirical support for an inverted-U-shaped
relationship between income and several important air pollutants (Harbaugh et al.,
2002). Environmental indicators, for which the EKC hypothesis is most plausible, are
various indicators of air pollutants such as SO2 and SPM. However, this EKC relation
is only confirmed for pollutants involving local short-term cost (for example, SPM,
SO2, CO, etc.), not for the accumulated stocks of waste or for pollutants involving
long-term and more dispersed costs (such as CO2), which are often increasing
functions of income. For example, for some pollutants, notably CO2 emission, the
EKC relationship does not hold in any meaningful way Holtz-Eakin and Selden,
1995; Dinda, 2001 ; Robers and Grimes, 1997.
The EKC may not hold even in the long run de Bruyn et al., 1998 ; Dinda et al.,
2000. Economy can foresee a so-called N-shaped curve, which exhibits the inverted-
U curve initially, but beyond a certain income level, the relationship between
environmental pressure and income turns positive38 again. This suggests that the re-
linking hypothesis may be plausible de Bruyn and Opschoor, 1997 ; Sengupta,
1997. For example, the levels of aggregate materials consumption over time may
show an N shape rather than an inverted-U shape.
Environmental quality also degrades due to water pollution. The relationship
between industrial share of national output and industrial water pollution follows a
Kuznets-type trajectory. However, other two determinants (share of polluting sectors
in industrial output and end-of-pipe pollution intensities in polluting sectors) do
not (Hettige et al., 2000b). Moreover, the EKC relation does not hold even for total
industrial water pollution and toxic pollution Lucas et al., 1992 ; Hettige et al., 2000b.
Environmental quality may also deteriorate as population pressure increases more
and more. It is clear from the existing literature that most of the world's population
lies on the upward sloping portion of EKCs. This implies that, even if the EKC exists,
income growth across the global population will increase environmental
damage (Ekins, 1997). Such damage is considered to be the main obstacle or
hindrance to attaining sustainable development (O'Neill et al., 1996). Thus,
economic growth may not automatically lead to a higher environmental quality and
only strong pressure for environmental policy39 may help in this regard (Grossman
and Krueger, 1995).
Environmental policy is designed on the basis of empirical findings, which actually
depends on the choice of appropriate variables (measured in terms of relative or
absolute level). Empirical studies have mostly used absolute measure of pollution
like amount of emission or pollution rather than a relative measure (like pollution or
emission per unit of output or per square kilometer, etc.). Use of a relative measure
of pollution or emission, i.e., pollution intensity, may reveal a U shape or a monotonic
relation with income rather than an inverted-U shape40 (which may be true for
absolute level). It should be noted in this context that the effect of income on
pollution intensity tends to be negative in open economies, but positive in closed
economies.
The objective of empirical study is not only to find the existing relationship but also to
help predict the future. Forecasting (or predictions) of environmental quality actually
depends on the estimated income–environment relationship (which is based on
observed data). Prediction will be meaningful and correct if the existing relations hold
in future. Predictive success is really a very limited conception over a longer period
of time. For example, the immediate past has allowed much growth and
technological progress that does not mean the same holds for an indefinite period of
time into the future. The existence of EKC does not ensure to exist in future because
of pressures of global competitions41 for environmental standards and regulations.
The EKC analysis does not yet establish the channels through which economic
globalization affects the pollution levels or existing environmental quality (Tisdell,
2001).
Finally, the concept of EKC cannot be applied to all the environmental factors. For
example, land-use change and/or bio-diversity loss, which are irreversible, are
conceptually different from air or water pollution.

6.2. A methodological critique

As mentioned above, several authors have applied various methodologies in their
empirical studies. Most of the studies have used cross-section data to examine the
EKC hypothesis for group of countries and enough attention has not been given to
country-specific EKC. The basic assumption behind pooling42 the data of different
countries in one panel is that economic development trajectory would be the same
for all. This assumption should be criticized because wide cross-country variations
are observed in social, economical, political and biophysical factors that may affect
environmental quality. (For example, the percentage of forest covered area in total
area varies from country to country.) Under such heterogeneity of conditions, the use
of random effect model may be appropriate for examining shape of economic
growth–environment relationship based on cross-country, cross-sectional
data43(Koop and Tole, 1999).
It should be noted that the global environmental degradation (GED) level instead of
country's pollution or emission levels due to economic development might be an
important factor (for global EKC), which has been ignored in the existing EKC
literature. Using environmental degradation index (EDI) and an appropriate measure
of economic development (i.e., Human Development Index [HDI]), one can develop
a global EKC model (Jha and Bhanu Murth, 2003). It should be noted that empirical
support for the existence of a global EKC for CO2 emissions44 has not been found,
although some meaningful relationships between income and CO2 emissions in
individual countries have been observed (Dijkgraaf and Vollebergh, 1998). The
coefficient estimates for carbon emissions45 for a panel of OECD countries differ from
those obtained for individual country-specific time series that constitute the panel.
Little attention has been paid to time series properties of the data, whether variables
used in EKC are stationary or/and integrated Perman and Stern, 1999 ; Coondoo
and Dinda, 2002.
A number of relevant factors have so far been omitted in the EKC studies, such as
transboundary and intergenerational externalities Ansuategi et al., 1998 ; Copeland,
1996. Trade is supposed to be an important explanatory factor for EKC relationship.
As argued above, high-income countries have greater emission reduction
possibilities because they may shift polluting industries to other countries through
trade. The export and import of manufactured goods are likely to be much stronger
determinants of the level of energy consumption than income (Suri and Chapman,
1998). The amount of energy consumption depends on its prices. Thus, the energy
price may be a relevant variable for explaining EKC (Agras and Chapman, 1999).
The non-availability of actual data on environmental quality is the major limitation of
all EKC studies. Truly speaking, environmental quality is something that is not easy
to be measured accurately. Therefore, an index of environmental quality, which
could be better measurement, should be developed and used to examine the EKC
hypothesis (Fare et al., 2001).
The empirical robustness of EKC relation still remains an open issue (Grossman and
Krueger, 1996). The reduced form rather than structural form equations have been
used in most of the EKC studies. Actually, environmental outcomes are related to
endowments of individual countries but (economic measures in) reduced forms are
silent about causal mechanisms.46 More structural forms may warrant exploration, for
some interdependence in our environmental indicators is probable (Dinda and
Coondoo, 2001). For example, use of pesticide may destroy useful insects or micro-
organisms (and thus hamper soil fertility) or threaten bird species, but this kind of
interdependence remains yet to be explored.

7. Conclusion
This paper reviews a number of studies on the Environmental Kuznets Curve
hypothesis. The EKC hypothesis postulates an inverted-U-shaped relationship
between different pollution indicators and income, that is, environmental pressure
increases up to a certain level as income goes up, after that it decreases. An EKC
actually reveals how a technically specified measurement of environmental quality
may change as the fortunes of a country change. Evidence of the existence of the
EKC has been questioned from several corners. Only some air quality indicators,
especially local pollutants, show the evidence of an EKC. Moreover, there is no
agreement in the literature about the income level (turning point) at which
environmental degradation starts to improve. This paper discusses about the results,
methods, explanations and policy implications of the studies that have found
empirical evidence for the EKC hypothesis. A critical evaluation follows these
discussions. There are increasing grounds to be cautious about EKC hypothesis and
related policies. Environmental degradation, actually, is a multifaceted problem and
different stages of environmental damage have some definite relations with
economic growth. Since one such relation is EKC, which can be explained in
multidimensional ways or in terms of multidimensional issues. From the EKC
literature, it is clear that there is no single policy, which can reduce pollution levels
with rising economic growth. However, the subject is open-ended and EKC analysis
continues to be widely used. Evidence for the existence of EKC is inconclusive.
From this mixed evidence about the relationship of economic growth and
environmental quality, we can draw some conclusions and some points require
elaboration for future research. Firstly, we need economic models, which properly
reflect the physical and ecological basis of economic activity, and important feedback
between the economy and the environment. Secondly, identification of the dominant
factors that explain the EKC should have a high priority in research. One can design
a policy that affects the course of the EKC only when the factors behind EKC have
been properly identified. Thirdly, estimation of structural models, instead of reduced-
form models, may be needed to identify the actual mechanism for this purpose.
Fourthly, decomposition analysis can provide more insight into which combination of
explanations is dominant, such as technological progress and structural changes.
Fifthly, in addition to panel data analysis, efforts should be devoted to time-series
analysis that may provide a better picture of the development of pollution associated
with specific phases of development in individual countries. Sixthly, on a political
level (there is no automatic process) courageous policy measures are necessary to
allow for economic sustainability. Lastly, in case of adoption of new technology,
society should be cautious about the possible unknown pollutants and waste
hazards.