Environmental Kuznets Curve: Tipping Points, Uncertainty and Weak Identification

We consider an empirical estimation of the environmental Kuznets curve (EKC) for carbon dioxide and sulphur, with a focus on confidence set estimation of the tipping point. Various econometric—parametric and nonparametric—methods are considered, reflecting the implications of persistence, endogeneity, the necessity of breaking down our panel regionally, trends and temporal instability, and the small number of countries within each panel. In particular, we propose a parametric inference method that corrects for potential weak-identification of the tipping point. Weak identification may occur if the true EKC is linear while a quadratic income term is nevertheless imposed into the estimated equation. Relevant literature to date confirms that non-linearity of the EKC is indeed not granted, which provides the motivation for our work. We also propose a non-parametric counterpart to the parametric confidence set, for sensitivity analysis. Viewed collectively, our results confirm an inverted U-shaped EKC in the OECD countries but generally not elsewhere, although a local-pollutant analysis suggests favorable exceptions beyond the OECD. Our measures of uncertainty confirm that it is difficult to identify economically plausible tipping points. Policy-relevant estimates of the tipping point can nevertheless be recovered from a local-pollutant long-run or non-parametric perspective. Copyright Springer Science+Business Media Dordrecht 2015