Does the ‘environmental Kuznets curve’ exist? An application of long-run structural modelling to Saudi Arabia

A. Mansur M. Masih, Lurion De Mello

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Abstract

This study examines the relationship between income and CO2 emission on a per capita basis in Saudi Arabia during 1975-2003. It is motivated by the recent heightened world concern over global warming pollution which resulted in the formulation of the Kyoto protocol and its rapid ratification by a majority of countries in the late 1990s. There have been many attempts to explain the increase in per capita CO2 emission by relating it to per capita income growth in a country via the ‘Environmental Kuznets Curve’ (EKC). The curve is named after Kuznets (1955) who hypothesized that income inequality in a country first rises and then falls as economic growth progresses. The EKC is usually postulated to have an inverted-U shape, which means that per capita income growth is initially associated with an increase in per capita CO2 emission. However, beyond a certain point, the relationship reverses and further per capita income growth is associated with a decrease in per capita CO2 emission. The practical implication of an EKC with inverted-U shape is that a continued increase of per capita income alone would ultimately reduce per capita CO2 emission, thus obviating the need for proactive political intervention. In contrast to the above, our study, based on a recently developed rigorous time series technique known as the Long Run Structural MODELLING (LRSM) (Pesaran and Shin, Econometric Reviews, 2002), indicates that at least in the context of Saudi Arabia (1975-2003) the EKC possesses a cubic-N shape. This implies that although increasing per capita income may indeed be associated with decreasing per capita CO2 emission for a certain period, in the long run the trend will reverse and it will again be associated with increasing per capita CO2 emission. This empirical finding of our study has a significant policy implication in that increases in per capita income alone are not enough to reduce per capita CO2 emission, but should be supported by a proactive industrial/technological policy that tackles related causes and also, since CO2 emission is evidenced to be mainly income-driven, policies should be focused on environment-friendly GDP growth. Moreover, not only the production but also the consumption of GDP, in particular the tastes and preferences of high-income individuals need to be environment-friendly. These findings have profound policy implications for both the developing and the developed economies of the world.
Original languageEnglish
Pages (from-to)211-235
Number of pages25
JournalEconomia internazionale
Volume64
Issue number2
Publication statusPublished - 2011

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Keywords

  • environmental Kuznets curve
  • long run structural modelling

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