Jonathan Ostry: Relationship Between Economic Development and Green Regulation

Environmental Kuznets Curve and Green Regulation 

Abstract
In this paper, we first test the validity of the Environmental Kuznets Curve (EKC) hypothesis, using
a large sample of approximately 190 advanced and developing countries, over a period of 34
years (1989-2022). We find that (CO2) emissions respond positively to increasing income per-
capita, up to a turning point of approximately US$25,000. In a departure from the previous
literature, we allow the relationship between economic development and emissions to depend on
the stringency of environmental regulation. Our results indicate that environmental policies—and
particularly market-based instruments, such as carbon taxes and emission trading
systems—make the EKC lower and flatter. These results are robust to several sensitivity checks,
and to the use of regional (rather than global) data. Overall, our results have important policy
implications, as they identify economic development as a pathway to environmental improvements.
Moreover, we show that environmental policies are an essential ingredient to achieve decoupling
of emissions and economic output over the longer term.

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