Carbon Kuznets curves: Long-run dynamics and policy events

This chapter aims to contribute to the development of Environmental Kuznets Curve (EKC) research, which is not fully surveyed given the literature has overwhelmingly increased over the past years, in two main directions. First, we use modern econometric panel approaches capable of providing new evidence on EKC long run dynamics. We employ recent homogeneous estimators – as those derived from panel cointegration analysis or those that explicitly take into account cross section correlation – as well as heterogeneous estimators which allow individual slopes to be derived from sampling or Bayesian approaches. It is difficult a priori to decide between homogeneous and heterogeneous panel estimators. On the one hand, the increasing time dimension means that the slope homogeneity implicit in the use of a pooled estimator is questionable. On the other hand, most researchers agree about the use of homogeneous estimators since the efficiency gains from pooling often overcome their costs (Baltagi et al. 2000, 2002, 2004). Some researchers have suggested using intermediate estimators as Bayesian shrinkage estimators (Maddala et al. 1997) or the Pooled Mean Group (PMG) estimator (Pesaran et al. 1999), allowing intercepts, short-run coefficients and error variances to differ freely across cross-sections, while long-run coefficients are held constant. Secondly, we focus on a policy relevant scenario, in which pro-Kyoto countries and the Umbrella Group, respectively led by the EU and the US, are compared in their EKC delinking performances. The main issue we address looking at a long run dynamics including the 1992-2001 pre and post Kyoto period, is why were some countries in favour of cutting CO2 emissions and others opposed. A part of the underlying answer may be connected with the eventual historical decoupling of CO2 and GDP, and ‘policy-related’ structural factors. More specifically, we may assume that the reason why some countries (EU, and within EU the northern countries including UK) supported Kyoto from the beginning and are supporting stricter targets (the 20-20-20 EU plan on energy and environmental efficiency) is that they took early actions in terms of economy restructuring and environmental policies. As early movers, they wanted to exploit the benefits related both to the Porter competitive advantages linked to new green technology markets (Porter and van der Linde 1995) and to the intrinsic advantage of reasoning in terms of CO2 reductions decided in 1997 at Kyoto, which define a compliance with respect to 1990 levels. What happened between 1992 and 1997, and before 1992, matter(ed). Early movers could take advantage of Kyoto targets more than others on many perspectives. Moreover, a lower elasticity and/or EKC evidence for a group (Northern EU) could explain stronger support for Kyoto, deriving from better historical environmental performance and favourable structural conditions. Nevertheless, this is the ‘average picture’; reasoning at the margins, the current achievement of EKC shapes could be associated with higher marginal abatement costs, than reduced incentives for further efforts, if one excludes the objective of intensifying green and economic competitive advantages spurred by innovation investments (Jaffe et al. 1995; Mazzanti e Zoboli 2009). In terms of current policy negotiations, structural differences in EKC shapes could inform the allocation of burdens in the Kyoto two phase (beyond 2012) for maximising economic efficiency at global level. Though policy implications may be linked to the analysis of EKC paths, we believe that the literature has so far provided weak evidence. We shed light on such policy implications by taking quite a different angle from usual EKC analyses. In fact, the policy oriented reasoning is key and derive both from: (i) a comparative assessment of EKC shapes for three group of countries, instead of analysing larger samples (OECD): the Umbrella group, EU south and EU northern countries; (ii) a series of structural break test on the relevance, in affecting the CO2 income time series, of exogenous political events, such as the 1992 Convention on climate change, the Kyoto protocol, searching also for other sources of structural break. We bring together policy analysis and the study of advanced econometric methodologies, including intervention analysis aimed at highlighting how exogenous (policy) events affect a long run structural dynamics. As recognised, policy events may be needed to reshape the business as usual EKC, by smoothing the bell and/or decreasing the income TP level. Economic growth matters for achieving higher environmental efficiency, but is not sufficient for sustainability. We provide some evidence on such issue. Although the political agenda is changing, mainly in the US, our aim is to provide food for thought for political negotiators in the context of the post Kyoto era, by examining the extent to which the structural differences of different groups of countries might explain their different policy perspectives and economic capabilities to tackle the climate change issue. Our Empirical evidence provides useful information for both the current scenario, in which the US is slowly coming to recognise the need to tackle climate change, but favours flexible policy instruments, and the EU is leading Kyoto implementation (Kruger and Pizer 2004) and the post Kyoto negotiation round, which should set the framework for the new climate change policy scenario.