The Environmental Kuznets Curve and the Energy Mix: A Structural Estimation

The Environmental Kuznets Curve (EKC) hypothesis establishes the existence of an inverted U-shaped relationship between income and environmental deterioration. This paper studies the relationship between the energy mix and pollutant emissions and uses an environmental dynamic general equilibrium model to carry out a structural estimation of the EKC hypothesis. The model considers a three-input production function, including energy. Energy is a composite of fossil fuels and renewable energy sources. The flow of pollutant emissions depends on fossil fuels' consumption, which accumulates in a pollution stock, resulting in a negative externality that adversely impacts aggregate productivity. Simulations of the model support the existence of a steady-state EKC relationship between Gross Domestic Product (GDP) and the stock of pollution, where the negative slope side of the curve is very flat. We find that (i) the EKC hypothesis is only fulfilled when the elasticity of substitution between fossil fuel and renewable energy is high enough; (ii) the higher the elasticity of the productivity to the stock of pollution, the lower the optimal stock of pollution as a function of output; and (iii) emissions efficiency has a positive impact on the environment in the short-run, but negative in the long-run.