A Regime Switching Analysis of the Income-Pollution Path with time Varying- Elasticities in a Heterogeneous Panel of Countries

We analyze the threshold effects of income changes on CO2 emissions in a large sample of 95 countries, over the period 1980-2017. Our estimation uses a Panel Smooth Transition Regression (PSTR) and controls for urbanization, energy consumption and population. Results of the point estimates show that income-pollution relation is captured by three continuums of regimes, and smooth transitions from one regime to another. In the first transition, the income-pollution elasticity is positive, meaning that a rise in income leads to more pollution. In the second transition, the coefficient tends to zero and is insignificant. This second transition represents an intermediate stage matching with the peak of EKC U-inverted curve, where the rise in income does not necessarily lead to more pollution. The third transition corresponds to the highest living standard and is characterized by a negative parameter. Any additional income leads to lesser pollution. For low-income countries, the turning point occurs at 1017$, for middle income at 1890$ and for high income at 12397$. These suggestive values, estimated inside the model, rather than pre-determined provide evidence that low and middle-income countries will not reach developed countries’ living standards to have their depollution at a sustainable level. Also, there is neither a single income threshold nor income-pollution path through which all countries should go through. Besides, developed countries’ income-pollution path appears to be more stable and resilient to external shocks as opposed to low- and middle-income countries. The major undermining factor for the atmosphere among the control variables is primary energy consumption. The impact of primary energy consumption remains high at all stages, with an average impact rate on CO2 emissions of 0.65% for any additional consumption. Population growth has a more positive impact on CO2, on average, than urbanization.