Revisiting Environmental Kuznets Curves through the energy Price lenses

Abstract

The goal of this paper is to provide new insights to make clear cut on the ambiguous evidence in favour of the Environmental Kuznets Curve (EKC) hypothesis. We contribute with an original explanation to dismiss the EKC based on relative energy prices. For the first time in the empirical literature, the econometric analysis includes the prices for coal, oil products and natural gas. We may conclude that there is evidence for a decoupling process between GDP and CO2 but without reaching any turning point on that relationship. Accordingly, the presence of relative energy price changes in the econometric specification confirms a monotonic and positive relationship between CO2 and GDP. Otherwise, we will eventually end up with distorted empirical evidence for EKC in our database, as long as we neglect energy substitution effects from price changes. The policy implications are straightforward: any international climate change agreement that eventually includes restrictions on developing countries might abate their legitimate ambitions for further economic development.