The Richer the Greener: Evidence from G7 Countries

This research applies a recently-developed nonlinear panel smooth transition regression (PSTR) model and takes into account the potential endogeneity biases to examine whether Environmental Kuznets Curve (EKC) exists in G7 countries over the period 1991-2008. This research makes three contributions to the CO2 emissions literature. First, we apply the panel smooth transition regression (PSTR) model of Gonz¨¢lez et al. (2005) to investigate the relationship among CO2 emissions per capita, energy use per capita, real gross fixed capital formation, real GDP per capita, and labor participation rate for G7 countries. Second, we complement the existing literature by simultaneously examining the impacts of energy use, real gross fixed capital formation, real GDP, and labor participation rate on CO2 emissions and take into account endogenous determination of real GDP on the PSTR model for CO2 emissions. Third, based on the characteristics of the PSTR model, we can consider the elasticity of CO2 emissions changes with country and time to analyze the elasticity of heterogeneous countries and the potential impacts of structural breaks on the CO2 emissions elasticity in the panel framework. Based on the elasticity of the CO2 emissions with respect to real income per capita, the environmental quality is a necessary good in Japan, the UK, and the USA, but a luxury good in the rest of G7 countries. Thus, there exists an inverted U-shaped relationship between CO2 emissions and real income per capita with the threshold value of US$20,488, which is endogenously determined. This finding supports the existence of EKC in G7 countries. In other words, our results confirm there exists the regime-switching effect of real income on CO2 emissions in G7 countries.