Environmental Kuznets Curve and climate change integrated assessment modelling: analysis and implications for policy makers

Nicola Cantore
nicola.cantore@unibo.it


In the last fifteen years a wide agreement has been reached about the certainty that human activity is increasing the concentrations of atmospheric greenhouse gases and that this will impact on an increased warming of the Earth’s surface. In order to tackle with this problem, an important strand of literature we refer to is the existence of the Environmental Kuznets curve (EKC) for global pollutants and in particular for CO2 emissions, the main global warming pollutant. The Environmental Kuznets Curve hypothesis assumes the existence of a bell shaped relationship between income and pollution. In other words, pollution tends to increase at the low income levels and to decrease after a certain point as income continues to grow. This empirical relationship generates a very strong policy prescription: if the EKC hypothesis is confirmed, the best way to tackle the Earth’s increase of the temperature is to foster economic growth. Until now the EKC literature mainly focussed on the existence of an EKC turning point for a wide set of pollutants and on the investigation by economic models of the most important EKC determinants. Therefore econometric tools and economic modelling have been the main tools to investigate relationship between growth and pollution. Recently a great number of integrated assessment models (IAM) have been implemented in order to analyse the global warming issue. The “integrated” dimension of these models derives from the fusion of economic and environmental aspects in the same modelling framework.

Generally speaking, IAMs have mainly been used by numerical simulations to investigate the global warming over time and the costs of possible policy and technology solutions to tackle the climate change issue, but little attention has been devoted to the EKC issue. Our work is aimed at filling this gap. Specifically IAM are very useful to investigate EKC for different reasons.

First, differing from the traditional empirical literature focussing on a reduced form relationship describing how the economy affects the environment, IAM analysis allows to capture the environmental feedback on the economy. Second, differing from the theoretical literature IAMs allow investigating more sophisticated interactions among variables in a macroeconomic context. The “integrated” nature of these models is more appropriate to capture complex connections affecting the relationship between income and pollution. However a high degree of complexity is compensated with a wider set of information and analysis accurateness that are crucial to set the opportune policies.Third, IAMs are very useful to capture determinants behind the EKC. EKC determinants can be easily identified in the IAM frameworks and opportune policy analysis can be implemented in order to investigate how the relationship between income and pollution can be driven according to sustainability criteria. Finally the EKC issue can be easily linked to economic and social analysis. A very interesting opportunity provided by IAMs is that they allow to investigate if different policy targets can be jointly reached and to identify trade offs. Moreover possible solutions can be widely analysed.

Unfortunately, there is no a wide literature in this field. This work constitutes therefore an attempt to provide a systematic and deep analysis of the EKC for CO2 emissions in this field.