A dynamic approach to the Environmental Kuznets Curve hypothesis

The Environmental Kuznets Curve (EKC) hypothesis states that pollution leve ls increase as a country develops, but begin to decrease as rising incomes pass beyond a turning point. In EKC analyses, the relationship between envi ronmental degradation and income is usually expressed as a quadratic functi on with the turning point occurring at a maximum pollution level. Other exp lanatory variables have been included in these models, but income regularly has had the most significant effect on indicators of environmental quality . One variable consistently omitted in these relationships is the price of energy. This paper analyzes previous models to illustrate the importance of prices in these models and then includes prices in an econometric EKC fram ework testing energy/income and CO2/income relationships. These long-run pr ice/income models find that income is no longer the most relevant indicator of environmental quality or energy demand. Indeed, we find no significant evidence for the existence of an EKC within the range of current incomes fo r energy in the presence of price and trade variables. (C) 1999 Elsevier Sc ience B.V. All rights reserved.