How do improvements in labour productivity in the Scottish economy affect the UK position on the Environmental Kuznets Curve?

The Environmental Kuznets Curve (EKC) hypothesis focuses on the argument that rising prosperity will eventually be accompanied by falling pollution levels as a result of one or more of three factors: (1) structural change in the economy; (2) demand for environmental quality increasing at a more-than-proportional rate; (3) technological progress. Here, we focus on the third of these. In previous work we have used single region/nation models of the Scottish and UK economies to simulate the impacts of increased labour and energy efficiency on the domestic economy’s position on the EKC, with a specific focus on CO2 emissions. There we find that, while the impacts of an increase in energy efficiency are difficult to predict, mainly due to the potential for ‘rebound’ effects, while increasing CO2 emissions, improved labour productivity is likely to move an economy along its EKC through more rapid GDP growth. However, recent developments in the EKC literature have raised the issue of whether this will still be the case if emissions are accounted for from a consumption rather than a production perspective (the ‘pollution leakage’ hypothesis) – i.e. taking account of indirect pollution generation embodied in trade flows rather than just domestic emissions generation. Here we extend our earlier single region analysis for Scotland by using an interregional CGE model of the UK economy to examine the likely impacts of an increase in Scottish labour productivity on the rest of the UK and on a national EKC through interregional labour migration and trade flows.