Decomposing the CO2-income tradeoff: an output distance function approach

The environmental Kuznets curve (EKC) hypothesis holds that economic growth leads to increases in pollution in early stages of development, but is a significant driver of environmental improvements as income levels increase. Most empirical applications have focused on estimating a reduced form equation in which the measure of environmental degradation is posited as a non-linear function of income. In this paper we develop a structural production model based on an output distance function to investigate the EKC hypothesis for CO2 in a panel of industrialized countries from 1971 to 2000. This structural approach allows for the decomposition of the observed emission changes into the scale, composition, and productivity effects, thus providing additional insight into the interlinked processes of economic growth and environmental change. The findings from our preferred model indicate that for most countries, the CO2-saving productivity effect is not large enough to offset the CO2-producing scale effect.