The environmental Kuznets curve: A semiparametric approach with cross-sectional dependence

This paper proposes a new approach to examine the relationship between CO2 emissions and economic developing. In particular, we propose to test the Environmental Kuznets Curve (EKC) hypothesis for a panel of 24 OECD countries and 32 non-OECD countries by developing a more flexible estimation technique which enables to account for functional form misspecification, cross-sectional dependence, and heterogeneous relationships among variables, simultaneously. We propose a new nonparametric estimator that extends the well-known Common Correlated Effect (CCE) approach from a fully parametric framework to a semiparametric panel data model. Our results corroborates that the nature and validity of the income–pollution relationship based on the EKC hypothesis depends on the model assumptions about the functional form specification. For all the countries analyzed, the proposed semiparametric estimator leads to non-monotonically increasing or decreasing relationships for CO2 emissions, depending on the level of economic development of the country.