A Dynamic Analysis of the Income-Pollution Relationship in a Two-country Setting

This research explores the presence of the income-pollution relationship in a dynamic two- country setting. We argue that the initial conditions of an economy, as described by its initial stock of physical capital, its total factor productivity, and the degree of environmental aware- ness, are critical determinants of the income-pollution paths. More importantly, these initial conditions have a more pronounced e¤ect in a world where economies interact with one another and transboundary and global pollutants are a¤ecting more than one country. We show that, in the presence of pollution externalities between two countries, the income-pollution paths these countries follow depend on the stage of development of each country, on their relative and absolute productivities, on the degree of environmental awareness and on the transbound- ary nature of the pollutants. In a two-country setting with pollution externalities even more complex patterns may arise compared to single country models, thereby con rming the non- linear e¤ect of growth on environmental outcomes. It is shown that even small asymmetries span income-pollution relationships that are signi cantly di¤erent than the prescribed inverted U-shaped patterns.