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    Environmental and Resource Economics 26: 305328, 2003.

    2003 Kluwer Academic Publishers. Printed in the Netherlands.305

    Economic Growth and Transboundary Pollution inEurope: An Empirical Analysis

    ALBERTO ANSUATEGIEkonomi Analisiaren Oinarriak I Saila, Ekonomi Zientzien Fakultatea, Lehendakari Agirre

    Etorbidea, 83, 48015 Bilbao (Spain)

    (E-mail: [email protected])

    Accepted 13 February 2003

    Abstract. The existing empirical evidence suggests that environmental Kuznets curves only exist for

    pollutants with semi-local and medium term impacts. Ansuategi and Perrings (2000) have considered

    the behavioral basis for the correlation observed between different spatial incidence of environmentaldegradation and the relation between economic growth and environmental quality. They show that

    self-interested planners following a Nash-type strategy tend to address environmental effects sequen-

    tially: addressing those with the most immediate costs first, and those whose costs are displaced in

    space later. This paper tests such behavioral basis in the context of sulphur dioxide emissions in

    Europe.

    Key words: economic growth, Kuznets, panel data, sulphur oxides, transboundary externalities

    Jel classification: O11, Q25, Q28, R15

    1. Introduction

    An idea that has attracted much interest recently is the notion that economic devel-opment can be of assistance to the environment rather than being a threat to it. Theintuition behind this hypothesis is that development will initially increase pressureon the environment but, as environmental quality becomes more scarce and to the

    extent that this scarcity is signaled in the price of polluting activity, substitutionwill take place in both the demand and supply sides of economic activity.

    A number of studies in the 1990s have evaluated this hypothesis empiricallyby estimating a reduced form relationship between indicators of environmentaldegradation and income. The pioneering work was the study of the potential

    environmental impacts of the North American Free Trade Agreement (NAFTA)carried out by Grossman and Krueger (1991). They studied the relationship

    between per capita income and concentrations of a series of air pollutants (sulphurdioxide, dark matter and suspended particulates) in a cross section of countries

    for different years. They concluded that economic growth tends to alleviate airpollution problems once a countrys per capita income reaches $4,000$5,000 (US$1985).

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    306 ALBERTO ANSUATEGI

    Subsequently, a relation of this sort has been found between per capita incomeand a series of indicators of environmental degradation such as sulphur dioxide,suspended particulates, dark matter, nitrogen oxides, carbon monoxide, toxic

    intensity of production, hazardous waste, energy use, traffic volumes, hydrocar-bons, and automotive lead emissions. All these findings have come to be known asEnvironmental Kuznets Curves (EKCs) after Kuznets (1955) study of the relationbetween per capita income and income inequality. Ansuategi et al. (1998) and Stern

    (1999) thoroughly review the EKC literature.But the evidence does not all run in the same direction. Some environmental

    problems such as lack of access to safe water and urban sanitation and concen-tration of lead in rivers and heavy particles in cities decline as income increases.

    Other indicators of environmental stress worsen as income increases. This is thecase, for example, with municipal waste and carbon dioxide emissions.

    Overall, the existing empirical evidence suggests that EKCs only exist forpollutants with semi-local and medium-term impacts. Access to safe water and

    provision of urban sanitation are local and urgent human needs and any threatto these tends to be addressed immediately. However, the effects on health,productivity and welfare of some air pollutants such as sulphur dioxide have lessimmediate effects and so are addressed only as a second order of business. Finally,

    the impacts of other pollution problems such as global warming harm people whoare geographically and temporally far from the pollution site and accordingly theytend to be ignored by the polluters.

    The importance of the spatial (and temporal) incidence of pollution in order todetermine the shape of the relationship between economic growth and environ-

    mental quality has been clearly stated in several critical reviews of the EKCliterature (Arrow et al. 1995; Barbier 1997; Ansuategi et al. 1998). Accord-

    ingly, some of the most recent EKC studies have started to consider internationalenvironmental spillovers as crucial parts of their analysis. Cole et al. (1997), for

    example, find that a log-linear function for emissions of CFCs and halons in1986 is increasing across countries, whereas the post-Montreal Protocol estimate(emissions in 1990) shows an EKC-type relationship. They therefore conclude thattransboundary pollutants either increase monotonically with income or else have

    turning points at high per capita income unless they have been subjected to a multi-lateral policy initiative. From a theoretical point of view, Ansuategi and Perrings(2000) incorporate transboundary externalities into Forsters (1973) simple modelof growth and pollution and show that de-linking environmental degradation from

    economic growth critically depends on the rate of externalisation of pollutionacross political borders.

    But the EKC literature is still lacking a more thorough empirical assessment ofthe importance of the spatial dispersion of pollutants in determining the pollution-

    growth relationship. From a different but related line of work, Murdoch et al.(1997) have derived an econometric specification for the demand of emissionsreductions that adjusts for the spatial dispersion of the pollutants. They conclude

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    ECONOMIC GROWTH AND TRANSBOUNDARY POLLUTION IN EUROPE 307

    that their model performs reasonably well for sulphur cutbacks in Europe. Theanalysis in this paper tries to bridge the gap between the approach taken byMurdoch et al. (1997) and the existing empirical studies of the relationship between

    economic growth and sulphur emissions/concentrations. The analysis in Murdochet al. (1997) has focused on the link between the spatial dispersion of pollu-tion and abatement strategies in European countries, but has not given a stepforward and showed the implications of such strategic behavior in shaping the

    emissions-income relationship. The analysis in this paper takes such a step.The paper is structured as follows. Section 2 identifies and motivates the

    approach adopted to test the relation between income and sulphur emissions.Section 3 introduces a general model of transboundary pollution and economic

    growth. Section 4 develops and interpretates the reduced form equation derivedfrom the theoretical model. The applicability of the theoretical model to Europeansulphur emissions is tested in section 5. Finally, some conclusions and policyimplications are drawn.

    2. Designing a Meaningful EKC

    EKCs have been typically estimated regressing some measure of environmentaldegradation against income and a set of exogenous factors. This is also the

    approach taken in this paper. However, the main difference of the analysis proposedhere with respect to previous studies centers on the variables included in boththe left hand side (LHS) and right hand side (RHS) of the equation representingthe reduced form relationship between environmental degradation and economic

    development.

    2.1. LHS OF THE EKC EQUATION

    This paper focuses on environmental degradation caused by sulphur dioxide emis-

    sions. The negative impact of sulphur dioxide in terms of ambient air qualityis positively linked to the quantity of the pollutant per unit of area or volume.This explains why many EKC studies have chosen ambient concentrations as thedependent variable in their regressions (Grossman and Krueger 1991, 1995; Shafik

    1994; Panayotou 1997; Kaufmann et al. 1998; Torras and Boyce 1998). However,there is an important shortcoming as regards the use of ambient concentrations.Concentrations measure local impact of emission activities without regard to the

    origin of such activities. In the case of transboundary pollution problems such assulphur dioxide emissions this means that ambient concentrations do not providea clear link with local economic activity. It could well be the case that a countrywith few local pollution sources showed high ambient concentration due to trans-boundary spillins from neighbouring countries. Thus, if we want to establish a

    causal relation between environmental degradation and local economic activity,

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    ambient concentrations do not constitute the most appropriate indicator of locallycaused environmental impact.

    The alternative is to use emission estimates, as they are directly linked to local

    economic activity. Panayotou (1993), Selden and Song (1994), de Bruyn (1997),Carson et al. (1997), Cole et al. (1997), Stern et al. (1998), Perman and Stern(1999), Stern (1999) and Perrings and Ansuategi (2000) use per capita emissions asdependent variables in their regressions. However, there are two important caveats

    in this approach. First, per capita emissions are not good proxies for environmentalimpact as they do not provide information about the size of the area into whichthey are released. We could have very densely populated areas where per capitaemissions were quite low but aggregated emissions were quite high relative to the