Investigating the Environmental Kuznets Curve for Canada: The hypothesis of the environmental Kuznets curve suggests that - as economies grow -...
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6. Investigating the Environmental Kuznets Curve for Canada:
The hypothesis of the environmental Kuznets curve suggests that - as economies grow - pollution and
environmental degradation increases with income, however, beyond a certain level of income (a turning
point) economic growth leads to a reduction in pollution (see Stern 2004). This implies that pollution
and environmental degradation follow an approximate inverted U-shaped function of income - see
Figure 1. The idea behind the theory is that initial growth is often driven by pollutant-intense industries,
then, as economies become more developed, production shifts away from polluting industries. Equally,
as incomes rise, people may be able to afford to care more about the environment.
You will investigate this hypothesis in a simple setting by assessing the link between per-capita CO2
emissions and per-capita real GDP for Canada using time series spanning the last 50+ years.
Download GDP per capita data for Canada from 1960-2014:
(https://fred.stlouisfed.org/series/NYGDPPCAPKDCAN)
Combine the GDP data with CO2 emissions per capita for Canada 1960-2014:
(https://data.worldbank.org/indicator/EN.ATM.CO2E.PC?locations=CA)
i) Plot log CO2 Emissions per capita &amp; log GDP per capita in a scatterplot. Interpret the plot.
ii) Estimate a simple model of the environmental Kuznets curve:
log(CO2pc,t) = Bo + B1 log(GDPpc,t) + B2 log(GDPpc,t) + ut
report and interpret your estimation results including coefficients and standard errors:
What sign are the coefficients and are they statistically different from zero?
What shape does the estimated relationship between log(GDP per capita) and
log(CO2 emissions) take? Do you find an inverted U-shape?
Is there a turning point in the relationship between log(GDP per capita) and
log(CO2 emissions)?
If so, in what year was the turning point reached?
iii) Are you confident in your model? What other important factors might be important that
have been omitted from this model?

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