Does economic growth reduce or increase pollution? An examination of Croatia’s sector-specific Environmental Kuznets Curve

This paper investigates the existence of sector-specific Environmental Kuznets Curves (EKC) in Croatia from 1995 to 2021. Using Autoregressive Distributed Lag (ARDL) and Error Correction Models (ECM), the relationship between greenhouse gas (GHG) emissions and Gross Domestic Product (GDP) is analysed across key climate-policy relevant sectors (CPRS). A stable long-term relationship with significant short-term adjustments was found in the energy-intensive sector, which is regulated under the European Union Emissions Trading System (EU ETS). Long-term cointegration, but with non-significant short-term adjustments, was observed in the buildings, transportation, and utility/electricity sectors. Among sectors with a significant long-term relationship, an inverted U-shaped Environmental Kuznets Curve (EKC)—where emissions initially rise and then, after reaching a certain GDP threshold, decline—was identified in the buildings and energy-intensive sectors. In contrast, a U-shaped relationship was found in the utility/electricity sector, where emissions initially decrease but start to increase again as GDP grows. The transportation sector shows a positive linear relationship with GDP, with emissions rising consistently with economic growth, highlighting the need for targeted interventions like carbon pricing. Conversely, the fossil fuel sector shows no significant GDP-emissions relationship, pointing to external factors like geopolitical risks as primary influences.