The Environmental Kuznets Curve in Consideration of Learning by Doing in Abatement

Beginning from the 1990s the relationship between pollution and income (PIR) moved to the focus of research. Various studies have found that the PIR of several pollutants takes the shape of an inverted U. This coherence became known as the Environmental Kuznets Curve (EKC). However, later studies expressed criticism on the existence of the EKC and blurred the picture. For example, more diversified evidence suggests that the EKC is valid only for short living, local pollutants, whereas long living global pollutants face a monotonically rising PIR. These facts should be considered in the theoretical research on the EKC. One can summarise the considered theoretical explanations in five groups: Behavioural changes and preferences, institutional changes, technological progress, structural change and reallocation of polluting industries. This thesis focuses on technology progress as explanation for the EKC. Particularly, I investigate how technological progress in abatement affects the EKC. To do so, I discuss two ways how the EKC arises from learning by doing in abatement. First following the work of Brock and Taylor (2003), I present how learning by doing causes constant returns to abatement on aggregate level. Furthermore, I assume that abatement is active only of the marginal disutility of pollution exceeds the marginal utility of consumption. As long as consumption is higher rated, capital is entirely spent on consumption, otherwise abatement is active such that pollution decreases while income still grows. This model results in the EKC. The second approach based on Egli and Steger (2007) is a generalisation of the first model. Learning by doing in abatement is modelled through increasing returns to scale in abatement. Here, the EKC arises without any further assumptions regarding abatement as in the first approach. Although the concept of learning by doing in abatement suggests that environmental policy does not influence the existence of the EKC, it is shown that regulation does affect its magnitude. Therefore, the EKC is no adequate symbol against environmental policy. Both models are analysed with respect to the turning point of the EKC finding that most determinants have the same impacts. Both models provide under small adjustments potential explanations for an N-shaped PIR, a frequently found variation of the EKC. It is shown that both models are compatible with most empirical regularities on economic growth and the environment other to the EKC. Finally, criticism on the IRS model regarding potential negative pollution can be rejected if the learning by doing is assumed to lead to fading IRS in abatement