Income and the demand for environmental quality

Abstract

The environmental Kuznets curve (EKC) is an empirical regularity showing how some pollutants increase and then decrease with rising per capita incomes. Popular discussions and models of the EKC emphasize the role of the income elasticity of demand for environmental quality as a driving force for the inverted U-shaped relationship between income and pollutants. This paper explores the role of the income elasticity of demand for environmental quality by decomposing the reduced-form effect of income on pollution, showing that preferences consistent with a positive income elasticity of demand for environmental quality are neither necessary nor sufficient for the EKC. Increasing pollution may occur with increasing income but preferences that would imply a high income elasticity of demand for environmental quality, and decreasing pollution may occur simultaneous with preferences that put lower values on pollution reduction as incomes rise.