Future Emissions Key Drivers: Global Economic Growth

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The relationship between economic growth and GHG emissions is not one-dimensional. On the one hand, economic growth leads to increased demand for goods and services, particularly energy supply. Conversely, increased economic activity may stimulate demand for low carbon technologies, such as energy efficient equipment. Economic growth may also stimulate the development of institutions conducive to environmental protection.

Determining the relationship between these factors is a key issue. The Environmental Kuznet’s Curve (EKC) is often cited to describe the balance of factors described above.  The EKC hypothesis reads as follows. In the early stages of development, economic growth (measured by GDP per capita) and pollution move in tandem. Once a certain point of growth is reached in the economy, the relationship inverts, and per capita pollution begins to decrease as the economy grows further. The EKC is graphically represented by an inverted U-shaped relationship between GDP per capita and pollution. Several explanations support the EKC hypothesis, including the increased environmental awareness with income, policy and/or technology thresholds, and increasing returns to abatement.

Generally, economic literature does not fully support the EKC hypothesis, but it does not disqualify it either.  Most studies find that GDP per capita and emissions per capita move in tandem (Schmalensee et al., 1998), but that there is significant flexibility in the coefficient of CO2 emissions per capita growth. Globally, a 1% increase in GDP per capita is estimated to induce a .5% to 1.5% increase in CO2 emissions per capita. However, the coefficient may be far larger or smaller. China, for example, experienced relatively constant CO2 emissions from fossil fuel combustion between 1997 and 2001, despite a near 30% increase in GDP. Disaggregating economic factors, such as sector-specific changes, is a key issue in current studies.