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The Carbon Kuznets Curve: A Cloudy Picture Emitted by Bad Econometrics?

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Author Info
Martin Wagner
Georg Müller-Fürstenberger

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Abstract

In this paper we discuss three important econometric problems with the estimation of Environmental Kuznets Curves, which we exemplify with the particular example of the Carbon Kuznets Curve (CKC). The Carbon Kuznets hypothesis postulates an inverse U-shaped relationship between per capita GDP and per capita CO2 emissions. All three problems occur in the presence of unit root nonstationary regressors in panels. Two of them are rather fundamental: First, the use of nonlinear transformations of integrated regressors in the Kuznets curve, which usually contains GDP and its square is problematic. This stems from the fact that nonlinear transformations of integrated processes are in general not integrated, which implies that (panel) unit root and cointegration techniques, widely used by now in the Kuznets curve literature, cannot be applied meaningfully in this context. Second, all methods applied up to now rest upon the assumption of cross-sectional independence. With a first application of factor model based methods that allow for cross-sectional dependence, we find evidence for nonstationary common factors in both the GDP and CO2 emissions series. Estimating the CKC on stationary de-factored data, we do not find support for an inverse U-shape. The third problem, abstaining at this point from the above two fundamental problems, is that the unit root and cointegration methods have been used too uncritically. In particular the notorious small sample problems of unit root and cointegration problems have been neglected. By applying various bootstrap algorithms and several estimators we show that a careful analysis should have lead researchers to interpret their results with more caution than commonly done, even when being unaware of the two problems stated above

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Paper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number dp0418.

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Date of creation: Dec 2004
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Handle: RePEc:ube:dpvwib:dp0418

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Keywords: Carbon Kuznets Curve; panel data; unit roots; cointegration; cross-sectional dependence; nonlinear transformations of regressors;

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Find related papers by JEL classification:
Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bagliani Marco & Bravo Giancarlo & Dalmazzone Silvana & Giaccaria Sergio & Golia Silvia, 2008. "Economic growth and environmental pressure: a worldwide panel analysis," Department of Economics Working Papers 200812, University of Turin. [Downloadable!]
  2. Yongfu Huang & Terry Barker, 2008. "The Clean Development Mechanism and Sustainable Development: A Panel Data Analysis," Environmental Economy and Policy Research Working Papers 39.2008, University of Cambridge, Department of Land Economics, revised 2008. [Downloadable!]
  3. Müller-Fürstenberger, Georg & Wagner, Martin, 2006. "Exploring the Environmental Kuznets Hypothesis. Theoretical and Econometric Problems," Economics Series 183, Institute for Advanced Studies. [Downloadable!]
    Other versions:
  4. Georg Muller-Furstenberger & Martin Wagner & Benito Muller, 2005. "Exploring the Carbon Kuznets Hypothesis," Others 0506009, EconWPA. [Downloadable!]
  5. Marzio Galeotti & Matteo Manera & Alessandro Lanza, 2009. "On the Robustness of Robustness Checks of the Environmental Kuznets Curve Hypothesis," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 42(4), pages 551-574, April. [Downloadable!] (restricted)
  6. Gengenbach,Christian & Palm,Franz C. & Urbain,Jean-Pierre, 2005. "Panel Cointegration Testing in the Presence of Common Factors," Research Memoranda 050, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  7. Nektarios Aslanidis, 2009. "Environmental Kuznets Curves for Carbon Emissions: A Critical Survey," Working Papers 2009.75, Fondazione Eni Enrico Mattei. [Downloadable!]
  8. Paul Burke, 2008. "Economic growth and pollution in the long run: the case of carbon dioxide," Environmental Economics Research Hub Research Reports 0805, Environmental Economics Research Hub, Crawford School, Australian National University. [Downloadable!]
  9. Andrade, André Luiz, 2009. "CO2 e crescimento econômico: uma análise para as emissões dos combustíveis líquidos de origem fóssil no Brasil
    [CO2 and economic growth: An analysis for emissions from burning fossil fuels in    ," MPRA Paper 15313, University Library of Munich, Germany. [Downloadable!]
  10. Valeria Costantini & Chiara Martini, 2006. "A Modified Environmental Kuznets Curve for Sustainable Development Assessment Using Panel Data," Working Papers 2006.148, Fondazione Eni Enrico Mattei. [Downloadable!]
  11. Marzio Galeotti & Matteo Manera & Alessandro Lanza, 2006. "On the Robustness of Robustness Checks of the Environmental Kuznets Curve," Working Papers 2006.22, Fondazione Eni Enrico Mattei. [Downloadable!]
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