Endogeneity in the Environmental Kuznets Curve: An Instrumental Variables Approach

Abstract

The effects of increasing income on environmental quality is an issue that has long puzzled economists. For over a decade, economists have theorized that a graph of environmental degradation versus income often looks something approximating an inverted-U shape, dubbed the environmental Kuznets curve (EKC) after Simon Kuznets' work in the 1950s and 1960s on income equality (Kuznets 1955, 1965). Among the reasons why economists have found the effects of increasing income on environmental quality so intriguing is that the answers to this question would help resolve fundamental issues concerning humanity's ability to develop economically, while still preserving the environment. Some economists hypothesize that there is a causal relationship between income and environmental degradation, and that the relation is in the shape of an inverted U: as countries "get rich, … first [environmental] problems increase, and then they decrease" (Lomborg and Pope 2003, p.9). According to this theory, the solution to environmental problems is to alleviate poverty.

Governance, Vulnerability to Climate Change, and Green Growth: International Evidence

“…While these studies acknowledge that corruption, political institutions, or social structure are instrumental in accurately measuring the connection between economic activity and environmental quality, they do not fully account for those factors in their analysis (see, for example, Panayotou, 1997;Barrett and Grady, 2000;Bhattarai and Hammig, 2001;Bernauer and Koubi, 2009;Leitao, 2010;Lin and Liscow, 2013). As such, our study contributes to the literature by more explicitly incorporating governance into the empirical analysis.…”

Spatial Spillover Effects of Environmental Pollution in China’s Central Plains Urban Agglomeration

“…The higher the Y value, the more serious the environmental pollution. As to the rigorous econometric model, multiple terms of explanatory variables in the EKC model will lead to a higher probability of serious multicollinearity in its variables, which is not conducive to the accuracy of the results [32]. Therefore, this research follows the relatively mature approach [33][34][35], assuming that economic growth has a quadratic relationship with environmental pollution in the CPUA, bringing the control variables into the model as follows:…”

Economic Development and Greenhouse Gas Emissions in the European Union Countries

“…Researchers used such variables as a composite index measuring the quality of political rights and civil liberties (Lin, Liscow 2013), other variables measuring whether or not the party of the chief executive has a left-wing orientation as well as the form of government − dictatorship or democracy; as well as democracy index (Mills, Waite 2009;Gassebner et al 2011;Wong, Lewis 2013), and the level of corruption (Cole 2007).…”

“…In the first stream of EKC studies, reduced EKC models have been estimated without any additional explanatory variables except for GDP proxy variables (Grossman, Krueger 1991Shafik, Bandyopadhyay 1992;Holtz-Eakin, Selden 1995). In the later EKC studies, so-called "expanded EKC models" were used, where the relationship between environmental quality indicators and a broader set of economic development variables (GDP, energy consumption, trade openness, urbanization and others) has been investigated (Iwata et al 2011;Baodong, Xiaokun 2011;Esteve, Tamarit 2012;He, Wang 2012;Fujii, Managi 2013;Liao, Cao 2013;Lin, Liscow 2013;Onafowora, Owoye 2014;Yin et al 2015). However, these studies still leave some open questions especially about policy recommendations, which have to be corrected in the course of a country's development.…”