Are there Environmental Kuznets Curves for US state-level CO2 emissions?

The Environmental Kuznets Curve (EKC) hypothesis argues that the relationship between the pollutant and output is inverted U-shaped, implying that environmental degradation increases with output during the early stages of economic growth, but declines with output after reaching a specified threshold. For the first time in the literature on the EKC hypothesis, this paper assesses the validity of the hypothesis across 48 US States, using the Common Correlated Effects (CCE) estimation procedure by Pesaran (2006) which allows us to obtain results in the presence of cointegration in the relationship between carbon emissions and a measure of output, and its squared value – which captures the inverted U-shaped relationship postulated by the EKC hypothesis. The panel data approach allows the study individual members of the panel, also resulting in efficiency gains that would not be associated with time series approaches based on the small sample size of 51 observations (1960–2010). The findings postulate that the EKC hypothesis holds in only 10 States, with the remaining 38 States should be reforming their environmental regulatory policies to prevent environmental degradation coming only at the expense of production and economic growth. As for the other 10 states, given that a threshold has been achieved, higher growth would be accompanied with lower emissions, and hence, no additional environmental policies are required.