Environmental Kuznets Curve and green regulation

In this paper, we first test the validity of the Environmental Kuznets Curve (EKC) hypothesis using a large sample of approximately 190 advanced and developing countries over the period 1989–2022. We find that CO2 emissions respond positively to increases in income per capita up to a turning point of approximately US$25,000. In a departure from the previous literature, we allow the relationship between economic development and emissions to depend on the stringency of environmental regulation. To guide the empirical analysis, we also develop a simplified theoretical framework linking economic development, emissions, and climate policy, highlighting the channels through which regulation affects both the level and curvature of the income–emissions relationship. Our results indicate that environmental policies—and particularly market-based instruments such as carbon taxes—make the EKC lower and flatter. These findings are robust to several sensitivity checks, including an instrumental variable strategy and the use of regional (rather than global) data. Overall, the results have important policy implications, showing that environmental policies are an essential ingredient for achieving long-run decoupling between emissions and economic output.