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:
Combine the GDP data with CO2 emissions per capita for Canada 1960-2014:
i) Plot log CO2 Emissions per capita & log GDP per capita in a scatterplot. Interpret the plot.
ii) Estimate a simple model of the environmental Kuznets curve: