Economic Growth and Transboundary Pollution in Europe: An Empirical Analysis

Environmental and Resource Economics 26: 305328, 2003.
2003 Kluwer Academic Publishers. Printed in the Netherlands.

305
Economic Growth and Transboundary Pollution in
Europe: An Empirical Analysis
ALBERTO ANSUATEGI
Ekonomi Analisiaren Oinarriak I Saila, Ekonomi Zientzien Fakultatea, Lehendakari Agirre
Etorbidea, 83, 48015 Bilbao (Spain)
(E-mail: jepancoa@bs.ehu.es)
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 environmental
degradation 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 rst, 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 classication: 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. The
intuition behind this hypothesis is that development will initially increase pressure
on the environment but, as environmental quality becomes more scarce and to the
extent that this scarcity is signaled in the price of polluting activity, substitution
will take place in both the demand and supply sides of economic activity.
A number of studies in the 1990s have evaluated this hypothesis empirically
by estimating a reduced form relationship between indicators of environmental
degradation 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 (sulphur
dioxide, dark matter and suspended particulates) in a cross section of countries
for different years. They concluded that economic growth tends to alleviate air
pollution problems once a countrys per capita income reaches $4,000$5,000 (US
$1985).
306 ALBERTO ANSUATEGI
Subsequently, a relation of this sort has been found between per capita income
and 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, trafc volumes, hydrocar-
bons, and automotive lead emissions. All these ndings have come to be known as
Environmental Kuznets Curves (EKCs) after Kuznets (1955) study of the relation
between 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 the
case, for example, with municipal waste and carbon dioxide emissions.
Overall, the existing empirical evidence suggests that EKCs only exist for
pollutants with semi-local and medium-term impacts. Access to safe water and
provision of urban sanitation are local and urgent human needs and any threat
to these tends to be addressed immediately. However, the effects on health,
productivity and welfare of some air pollutants such as sulphur dioxide have less
immediate 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 who
are geographically and temporally far from the pollution site and accordingly they
tend to be ignored by the polluters.
The importance of the spatial (and temporal) incidence of pollution in order to
determine the shape of the relationship between economic growth and environ-
mental quality has been clearly stated in several critical reviews of the EKC
literature (Arrow et al. 1995; Barbier 1997; Ansuategi et al. 1998). Accord-
ingly, some of the most recent EKC studies have started to consider international
environmental spillovers as crucial parts of their analysis. Cole et al. (1997), for
example, nd that a log-linear function for emissions of CFCs and halons in
1986 is increasing across countries, whereas the post-Montreal Protocol estimate
(emissions in 1990) shows an EKC-type relationship. They therefore conclude that
transboundary 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 model
of growth and pollution and show that de-linking environmental degradation from
economic growth critically depends on the rate of externalisation of pollution
across political borders.
But the EKC literature is still lacking a more thorough empirical assessment of
the 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 specication for the demand of emissions
reductions that adjusts for the spatial dispersion of the pollutants. They conclude
ECONOMIC GROWTH AND TRANSBOUNDARY POLLUTION IN EUROPE 307
that their model performs reasonably well for sulphur cutbacks in Europe. The
analysis in this paper tries to bridge the gap between the approach taken by
Murdoch et al. (1997) and the existing empirical studies of the relationship between
economic growth and sulphur emissions/concentrations. The analysis in Murdoch
et 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 step
forward 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 identies 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 derived
from the theoretical model. The applicability of the theoretical model to European
sulphur emissions is tested in section 5. Finally, some conclusions and policy
implications are drawn.
2. Designing a Meaningful EKC
EKCs have been typically estimated regressing some measure of environmental
degradation against income and a set of exogenous factors. This is also the
approach taken in this paper. However, the main difference of the analysis proposed
here with respect to previous studies centers on the variables included in both
the left hand side (LHS) and right hand side (RHS) of the equation representing
the 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 quality
is 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 the
dependent variable in their regressions (Grossman and Krueger 1991, 1995; Shak
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 as
sulphur dioxide emissions this means that ambient concentrations do not provide
a clear link with local economic activity. It could well be the case that a country
with 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,
ambient concentrations do not constitute the most appropriate indicator of locally
caused 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 as
dependent variables in their regressions. However, there are two important caveats
in this approach. First, per capita emissions are not good proxies for environmental
impact as they do not provide information about the size of the area into which
they are released. We could have very densely populated areas where per capita
emissions were quite low but aggregated emissions were quite high relative to the
area into which they were released.This leads us to consider that emission density
(emissions per area) constitutes a better indicator of environmental degradation.
Second, we have to bear in mind that emission density measures the impact of local
polluting activities without regard to the location of such impacts. This will require,
as we will suggest immediately, some adjustments in the RHS of the equation.
2.2. RHS OF THE EKC EQUATION
The main variable in the RHS of the equation is an indicator of economic devel-
opment. In line with previous studies, the indicator of economic development used
in this paper is real income.
1
However, real income can be presented in several
ways. Most studies have chosen per capita income as a single indicator of devel-
opment, but Panayotou (1997) and Kaufmann et al. (1998) include income density
(income per area) as an additional variable in the set of independent variables. In
Panayotous paper income density is considered to represent the scale of economic
activity, whereas per capita income is interpreted as a representation of the equi-
librium level of abatement. Kaufmann et al. motivate the inclusion of these two
variables in a slightly different manner. In their study income density represents
the supply side factors that drive reductions in SO
2
concentrations whereas per
capita income represents the demand side factors.
The analysis in this paper also considers the inclusion of both specications
(per capita and per area) for the income variable. The motivation is as follows.
In the case of sulphur dioxide, emissions are generated by both consumption and
production activities and a single variable is not able to represent adequately the
contribution of both types of activities. Per capita income represents consumers
purchasing power and therefore proxies consumption patterns. If we accompany
per capita income with population density in the RHS of the equation, then both
scale and composition of consumption activities are captured. Income density
represents the income generating capacity of a unit of land and consequently may
be considered as a proxy for capital accumulation. By including income density in
the set of explanatory variables, the model captures the effect of production patterns
on emissions.
It is also necessary to account for the potential transfer of pollutants across
borders. Previous EKC-type studies of the relation between economic growth
and environmental degradation generated by sulphur oxides emissions have not
succeeded in fully integrating the transboundary nature of this type of pollution.
2
Some studies have included location-specic characteristics (topography and
climate) as explanatory variables for urban concentrations of sulphur dioxides.
This implies that they were aware of the importance of topography and meteorolo-
gical conditions in determining whether pollutants accumulate in locally restricted
zones or are shifted to different areas. What they have not taken into account is
the interaction between physical and socio-economic aspects. Including a separate
variable for location-specic characteristics that does not interact with income
reveals the implicit assumption that decision-makers do not change their behavior
when dealing with environmental impacts occurring at different locations. But if
decision-makers act strategically, we would expect that the income elasticity of
abatement expenditures will differ between countries whose capacity to externalise
transboundary pollution varies. This is the theoretical result obtained in Ansuategi
and Perrings (2000). This result will be modeled here through dummy variables
representing the degree of externalisation of pollution across borders and crossing
them with the development indicators.
In the next section a generalized version of the model of transboundary pollution
and economic growth used in Ansuategi and Perrings (2000) is presented whose
main aim is to provide some theoretical support to the specication of the EKC
equation motivated in this section.
3. A Model of Transboundary Pollution and Economic Growth
The model to be presented here is a generalized version of the model used in
Ansuategi and Perrings (2000). It assumes n economically closed but environ-
mentally open countries indexed i = 1, ..., n; each country being represented by
a social planner whose interests are those of the countrys citizens. Normalizing
the number of citizens at time 0 as unity, population size at time t is
N
i
(t ) = e
n
i
t
(1)
where n
i
is an exogenous and constant rate of population growth.
Each country produces a single homogeneous output (Y
i
) using capital (K
i
) and
labor (L
i
) as inputs:
Y
i
= (K
i
, L
i
) (2)
where labor force is supposed to be a constant proportion of population (L
i
=
l
i
N
i
). exhibits constants returns to scale in K and L, and each input exhibits
positive and diminishing marginal product. Output can be used either for consump-
tion (C
i
), for pollution abatement (A
i
) or capital accumulation (I
i
). For simplicity,
no depreciation is assumed.
Table I. % sulphur emissions by source (1990)
Mobile Stationary
Power Fuel combustion Industrial Misc.
Stations Industrial Others Process
Austria 7.7 17.8 35.5 22.4 16.6
Belgium 5.3 23.4 53 11.7 5.3 1.3
Denmark 10.4 65 12.5 7.7 4.4
Finland 2.2 23.5 25.3 10 38
France 12 26.1 21.6 15.1 15 10.2
W.Germany 6.3 33.6 35.2 15.3 9.6
Hungary 1.6 43 26.5 2.2 25 1.7
Ireland 2.7 55 22 19.3 1
Italy 9 45.6 34 4.9 6.2 0.3
Netherlands 14.7 22.1 40.7 3.8 18.7
Norway 22.2 1.8 13.9 6.5 55.6
Poland 1.7 49 15.6 25.4 8.3
Portugal 5.9 61.2 18.9 1.4 12.6
Spain 3.9 66.3 21.7 4.4 1.8 1.9
Sweden 27.2 11.8 16.2 11.8 33
Switzerland 7.9 1.6 42.9 23.8 19 0.5
UK 3 72.5 18.4 5.5 0.6
Source: OECD (1995).
Emissions (E
i
) are dened as by-products of both production and consumption
activities. Table I shows the proportion of sulphur oxides emissions by source for
17 European countries in 1990. Emission sources are classied in two categories:
mobile versus stationary sources. Most stationary sources are devoted to production
activities (electricity generation and industrial activities), whereas mobile sources
are strongly linked with consumption activities (domestic fuel consumption and
transportation).
3
Two types of abatement expenditures are thus assumed. The rst type (A
1i
)
represents abatement activity in the production sector. This category of abatement
comprises the incremental production costs imposed by activities such as coal
cleaning, burning of low sulphur coals, ue desulphurization and dry scrubbing.
4
The second type (A
2i
) represents expenditures directed to reduce the negative
by-product of consumption activities. This category of abatement comprises the
incremental consumption costs imposed by, inter alia, improved insulation of
houses, substitutions towards cleaner fuels and more energy-efcient domestic
appliances, regulations such as emission standards on vehicles, road pricing, depre-
ciation or regulatory rules that force an increase in the rate of turnover of vehicle
eet.
Thus, total emissions in each territorial unit can be calculated adding up
production-generated emissions (E
1i
) and consumption-generated emissions
(E
2i
). Assuming that (1) production and consumption activities are evenly distri-
buted across the area of the country and (2) that there are no area-related external
economies/diseconomies with regard to sulphur emissions,
5
total emissions can be
represented as
E
i
= S
i
_
E
1i
_
K
i
S
i
,
A
1i
S
i
_
+E
2i
_
c
i
,
N
i
S
i
,
A
2i
S
i
__
(3)
where c
i
represents per capita consumption and S
i
stands for area of country i.
Thus, emission density can be represented as
E
i
S
i
=
_
E
1i
_
K
i
S
i
,
A
1i
S
i
_
+E
2i
_
c
i
,
N
i
S
i
,
A
2i
S
i
__
(4)
Sulphur dioxide shows a mean atmospheric residence time of two to three days.
This residence time is enough for sulphur dioxide to be transported by wind over
hundreds or several thousands of kilometers. Considering the transboundary nature
of sulphur dioxide emissions, pollution in country i is thus represented by the ow
P
i
=
_
_
1
n
j=i
T
ij
_
_
E
i
S
i
+
n
j=i
T
ji
S
i
E
j
+
B
i
S
i
(5)
where B
i
represents the background depositions in country i and where T
ij
repre-
sents the proportion of emissions generated in country i and deposited in country
j. It is assumed that spillins from country j spread evenly in country i.
6
Each citizens welfare at any time in country i is measured by a quasi-concave
utility function with per capita consumption and local pollution as arguments:
U
i
(c
i
(t ), P
i
(t )) (6)
The objective of the social planner in country i is to maximize the discounted
ow of aggregated utility over time:
W
i
(t ) =
_

t
e
i
(st )
N
i
(s)U
i
(c
i
(s), P
i
(s))ds (7)
where
i
represents the rate of time preference of country i.
The public good nature of air pollution abatement implies that abatement
expenditure by one individual improves environmental quality for all individuals
sharing the same environment. Thus, individuals will have an incentive to free
ride on the efforts of those who control emissions. Modern economies rely on
governments or central planners for the provision of public goods that would not
be efciently provided by individual actions. The control of sulphur emissions in
Europe may be considered as one case where a local government provides the
locally efcient level of abatement, overcoming free-riding incentives within
local boundaries. But local governments are not expected to internalise trans-
boundary spillovers. In the case of transboundary pollutants such as sulphur
emissions, international spillovers exist that prevent an internationally efcient
provision of abatement and, in the absence of supranational governments with
enforcing power, we may expect that local planners will act strategically with
regard to national abatement effort. Thus, the interaction between the n sovereign
social planners is formulated as a differential game where planner i believes that
country j = i will follow a given time path (I
j
(t ), C
j
(t ), A
1j
(t ), A
2j
(t )) regardless
of what (I
i
(t ), C
i
(t ), A
1i
(t ), A
2i
(t )) might be. This yields an Open-Loop Nash
Equilibrium, where one country takes the other countries policies as given. Planner
is problem is then to choose
_
I
i
(t )
S
i
, c
i
(t ),
A
1i
(t )
S
i
,
A
2i
(t )
S
i
_
to maximize the integral of
its discounted ow of social net benets, as specied by
max
_

0
e
i
t
N
i
(t )U
i
(c
i
(t ), P
i
(t ))dt (8)
s.t.
d
K
i
(t )
S
i
dt
=
_
K
i
(t )
S
i
,
L
i
(t )
S
i
_
N
i
S
i
c
i
(t )
A
1i
(t )
S
i
A
2i
(t )
S
i
with
A
1i
S
i
0 and
A
2i
S
i
0
From the rst order conditions of the optimization problem we know that the
marginal utility of pollution control in both production and consumption activities
must (if possible) equal the marginal cost of pollution control in terms of foregone
consumption:
N
i
S
i
U
i
P
i
_
_
1
n
i=j
T
ij
_
_
E
1i
A
1i
S
i
=
N
i
S
i
U
i
P
i
_
_
1
n
i=j
T
ij
_
_
E
2i
A
2i
S
i
(9)
=
U
i
c
i
+
N
i
S
i
U
i
P
i
_
_
1
n
i=j
T
ij
_
_
E
2i
C
i
S
i
Thus, for a given set of preferences and technology, it is possible to dene both
types of abatement expenditure as functions of the level of local population, local
polluting activity, the total rate of externalisation of local emissions and the amount
of local depositions originated in other countries:
7
A
1i
S
i
=
1i
_
_
N
i
S
i
,
K
i
S
i
, c
i
,
_
_
1
n
i=j
T
ij
_
_
,
n
j=i
T
ji
S
i
E
j
+
B
i
S
i
_
_
(10)
A
2i
S
i
=
2i
_
_
N
i
S
i
,
K
i
S
i
, c
i
,
_
_
1
n
i=j
T
ij
_
_
,
n
j=i
T
ji
S
i
E
j
+
B
i
S
i
_
_
(11)
Substituting (10) and (11) into (3) we obtain that
E
i
S
i
= E
1i
_
_
K
i
S
i
,
1i
_
_
N
i
S
i
,
K
i
S
i
, c
i
,
_
_
1
n
i=j
T
ij
_
_
,
n
j=i
T
ji
S
i
E
j
B
i
S
i
_
_
_
_
+ (12)
E
2i
_
_
N
i
S
i
, c
i
,
2i
_
_
N
i
S
i
,
K
i
S
i
, c
i
,
_
_
1
n
i=j
T
ij
_
_
,
n
j=i
T
ji
S
i
E
j
+
B
i
S
i
_
_
_
_
To simplify notation, we can rewrite equation (12) as:
E
i
S
i
= f
_
_
N
i
S
i
,
K
i
S
i
, c
i
,
_
_
1
n
i=j
T
ij
_
_
,
n
j=i
T
ji
S
i
E
j
+
B
i
S
i
_
_
(13)
Equation (13) is a representation of the optimal level of emission density chosen
by a social planner following Nash-type strategic behavior in respect of trans-
boundary emissions. Obtaining a detailed analytical description of such an equation
would require a complex calibration exercise of the underlying structural model
that is far beyond the scope of this paper.
8
Instead we will proceed in two steps.
First we will review some of the arguments used in the EKC literature to explain
the relationship between growth and the environmental quality in order to generate
a hypothesis as to the direction in which the variables in the LHS of equation (13)
affect emission density. Next we will test the hypothesized functional form for
equation (13) using data on European sulphur emissions.
4. Emissions, Population, Technology, Afuence and Transboundary
Spillovers
The so-called impact equation put forward by Ehrlich and Ehrlich (1981) singles
out three factors that impact on the environment:
I = P AT (14)
where I, P, A and T stand for impact, population, afuence and technology
respectively.
Equation (13) may be thought of an alternative form of as the impact equa-
tion. The main difference is that in equation (13) the LHS represents potential
impact and not actual impact on the local environment. The inclusion of trans-
boundary spillovers in the RHS is therefore motivated by this difference. In what
follows we will discuss the specic polynomial expansion that can be expected for
equation (13).
There is no clear a priori expectation as to the direction in which popula-
tion density affects emission density. On the one hand, more people per square
kilometre means higher demand in cooking, heating and other energy intensive
domestic uses that would lead to an increase in emissions per square kilometre. On
the other hand, there are economies of scale in populations energy demand as well
as increased concern about abating emissions at every level of income in densely
populated areas. Thus, the relationship between emission density and population
density could either be linear or quadratic, depending on the relative strength of
these two effects as population density rises.
The conventional reduced-form relationship between pollution and per capita
income typically yields a positive sign for low levels of per capita income and
a reversal in sign for higher levels. Early explanations of the EKC hypothesis
focused on the conjecture that environmental quality is a luxury good, that is, the
demand for improved environmental quality increases more than proportionately
with income. This demand-side argument for the EKC hypothesis predicts a
quadratic relationship between environmental quality and per capita income with a
positive linear term and negative quadratic term.
Yet there is also a supply-side argument for the EKC hypothesis. The struc-
tural economic change that usually accompanies economic growth may play a
very important role in de-linking environmental degradation and economic growth.
But we cannot expect per capita income to constitute a good proxy of structural
economic change. As suggested in section 2, income density (income generating
capacity of a unit of land) constitutes a better proxy of production patterns or
technology than per capita income. Given the fact that higher capital intensities
of economic production tend to be more polluting at rst stages of development
and cleaner afterwards, it is expected that there will be an inverted-U shaped
relationship between emission density and income density.
Finally, it is necessary to provide some insights about the expected role that
the rate of externalisation of local emissions and the spillin density coming
from abroad plays in our impact equation. Our argument is that the process
by which society develops stronger preference towards environmental quality as
per capita income rises will be slower the lower the response of environmental
quality to changes in local economic activities and the lower the background
level of environmental degradation. In other words, agents act strategically and
only care about actual and local impact of their economic activity. Thus, both
_
1
n
j=i
T
ij
_
and

n
j=i
T
ji
S
i
E
j
+
B
i
S
i
will be expected to affect directly the
relationship between afuence and emissions, leading to a atter inverted-U the
lower the rate of externalisation of local emissions and the higher the back-
ground level of environmental degradation. But we could also expect the rela-
tionship of technology and emissions to be indirectly affected. Note that structural
change of economic activity could be accelerated by policy interventions that are
demand-driven. Thus, a similar attening can be expected for the inverted U rela-
tionship between income density and emission density with
_
1
n
j=i
T
ij
_
and
n
j=i
T
ji
S
i
E
j
+
B
i
S
i
.
In this paper we hypothesize that the data observed in the real world are gener-
ated from the type of behavioral relationship described in the model presented
here and that the relationship provides a good representation of past behavior. The
following section will try to refute it using past evidence of sulphur emissions in
Europe.
Some may question the validity of the Nash-type strategy assumption to
represent European countries behavior, since most European countries ratied on
16 March 1983 the so-called Long-Range Transboundary Air Pollution (LRTAP)
Convention and on 8 July 1985 the Helsinki Protocol to the LRTAP Convention was
adopted. Recall that the Helsinki Protocol committed ratiers to reduce sulphur
emissions by at least 30%, based on 1980 levels, by 1993. However, Barrett (1994)
demonstrated that treaties like the Helsinki Protocol, where more than a few parti-
cipants are involved, are unlikely to achieve much in cooperative gains. In fact,
Murdoch et al. (1997) nd that free-riding does, indeed, characterize the behavior
of the ratiers of the Helsinki Protocol.
Unfortunately time series for European sulphur emissions are very limited and
the analysis will be carried out pooling time series across countries. The validity
of the empirical analysis using cross-sectional evidence to test a dynamic model
as the one presented above, heavily depends on the assumption of the existence
of a common structure for the countries in the sample. Restricting the analysis to
Europe will make it easier to consider homogeneity of preferences and technology
across countries.
5. Empirical Test
5.1. DATA
To estimate equation (13) we need data on population density, capital stock per unit
of land, per capita consumption, proportion of local emissions that remain within
local boundaries and density of spillins originated abroad. Per capita consumption
and capital accumulation are proxied by per capita income and income density
respectively.
9
We have 21 countries in Europe
10
that generate useful annual observations over
seven years (1985, 19871992) for the study. Emissions by country and by year
are obtained from EMEP (Sandnes 1993). Emission density (EMISS) is gener-
ated dividing total emissions by total area reported in the D obr s Report (Stanners
and Bourdeau 1995). Real income per capita (INCOME) and population density
(DENSITY) are obtained from World Tables (World Bank 1994) and D obr s
Report (Stanners and Bourdeau 1995) respectively.
11
Income density (INCDEN)
results from the product of INCOME and DENSITY. The proportion of a countrys
sulphur emissions that falls within its own borders (INTERIOR) is calculated from
the 1985 Budget of Oxidized Sulphur in Sandnes (1993). INTERIOR is converted
into a dummy variable (D), which equals 1 if the proportion is higher than 65
per cent, and 0 otherwise. The density of depositions spilled in by other coun-
Table II. Summary statistics: population density
D = 1, Z = 1 D = 0, Z = 0 D = 0, Z = 1 D = 1, Z = 0
Min 90.05 12.82 113.7 14.5
Mean 137.01 110.96 307.31 94.826
Max 246.2 328 406.9 246.4
N 21 46 17 58
Table III. Summary statistics: per capita income
D = 1, Z = 1 D = 0, Z = 0 D = 0, Z = 1 D = 1, Z = 0
Min 1488 2344 2049 937
Mean 12654 13269 11953 11729
Max 29920 29150 17310 28670
N 21 46 17 58
Table IV. Summary statistics: income density
D = 1, Z = 1 D = 0, Z = 0 D = 0, Z = 1 D = 1, Z = 0
Min 181400 197100 234700 84580
Mean 1858900 1541200 4082400 1105900
Max 5002000 5316000 6910000 4877000
N 21 46 17 58
tries (SPILLIN) is also calculated from the 1985 Budget of Oxidized Sulphur in
Sandnes (1993). SPILLIN is converted into a dummy variable (Z), which equals
1 if the spillin density is > 1.5 Tonnes per square kilometre, and 0 otherwise.
12
Permutations of D and Z equal to 0 and 1 will allow us to consider four different
cases: (i) D = 1 and Z = 1, (ii) D = 0 and Z = 0, (iii) D = 0 and Z = 1, and
(iv) D = 1 and Z = 0. In what follows, countries belonging to these cases will
be referred as (i) downstream countries, (ii) upstream countries, (iii) countries
along the stream, and (iv) environmentally sealed countries, respectively. Note
that this classication is intertemporally consistent, that is, countries remain in the
same category over time.
Tables II to IV provide summary statistics for population density, per capita
income and income density.
5.2. STATISTICAL MODEL
Using the variables dened above and given the a priori expectations about the
relationship between variables presented in the previous section, we re-specify
equation (13) as
EMISS
i
=
i
+DENSIT Y
i
+DENSIT Y
2
i
+ (15)
(
0
+D
i
1
+Z
i
2
)INCDEN
i
+
(
0
+D
i
1
+Z
i
2
)INCDEN
2
i
+
(
0
+D
i
1
+Z
i
2
)INCOME
i
+
(
0
+D
i
1
+Z
i
2
)INCOME
2
i
+
YEAR
A time trend variable is also included (YEAR) to capture any time-related
exogenous shifts in technology or preferences unrelated to income or density
levels.
There is an important complication that restricts both the statistical model and
the methodology in the estimation. Note that the results of our model are strongly
dependent on the validity of the assumption that political decisions accurately
reect social demand. However, our sample includes countries with very different
political systems and therefore different abilities to reect social demand. This
can be addressed by including a dummy variable to control for this difference.
13
However, such a regressor would not vary within the groups, and this means that
a LSDV (xed effects) could not be computed.
14
On the other hand, note that
(i) excluding this dummy variable from our analysis, the effect of this variable is
absorbed by the individual effects and (ii) the ability of political systems to reect
social demand in Europe is highly correlated with income. This would mean that
we cannot assume that the individual effects are uncorrelated with other regressors,
which makes random effects inconsistent.
The two options are: (1) include the dummy variable and specify our equation as
a random effects model; or (2) exclude the dummy variable and specify our equa-
tion as a xed effects model.
15
Having tried both options, we consider option (2) as
the more appropriate one since in option (1) LIMDEP renders negative estimators
of
2
(which can be interpreted as a signal of inappropriateness of the model).

16
5.3. EMPIRICAL RESULTS
Examining the sensitivity of the estimates to alternative polynomial specications
of equation (15), the quadratic specication for population density, per capita
income (in logs) and income density (in logs) yields the best t. Table V reports
the results.
17
Figures 1 to 3 depict the relationships between emission density and the
explanatory variables that result from the regression reported in Tables V and VI.
Figure 1. Emission density (logs) vs population density.
Figure 2. Emission density (logs) vs income density (logs).
Table VII reports the elasticities of emission density with respect to income density
(
EK
), the elasticities of emission density with respect to per capita income (
EC
)
and the overall income elasticities as obtained from differentiating the estimating
equation with respect to all income-dependent terms and evaluated at mean values
for land area and population (
EY
). Note that elasticities of emission density with
respect to both income density and per capita income have very high magnitude
and opposing sign, which is not surprising given the high correlation of income
density and per capita income.
Figure 3. Emission density (logs) vs pc income (logs).
Figure 4. Income elasticities of emission density.
Figure 4 represents graphically overall income elasticities of emission density.
In the four sub-samples of countries income elasticity of emission density is
positive for low income values but reverses sign as income rises. This means that
there is a turning point (point at which income elasticity of emission density takes
on a value of 0) for each sub-sample. Table VIII presents these turning points both
in total and per capita income levels.
Table V. Estimation results for SO
2
emission density (logs)
Fixed Effects
VARIABLE COEFFICIENT T-RATIO
DENSIT Y 0.25995 6.974
DENSIT Y
2
0.29103E-03 6.892
LOGINCOME 20.800 7.333
LOGINCOME
2
0.26923 6.448
DxLOGINCOME
DxLOGINCOME
2
0.26748 3.788
LOGINCDEN 16.063 6.113
LOGINCDEN
2

DxLOGINCDEN
DxLOGINCDEN
2
0.18016 3.933
ZxLOGINCOME 8.1506 3.097
ZxLOGINCOME
2
0.43764 3.207
ZxLOGINCDEN 5.0409 3.075
ZxLOGINCDEN
2
0.16834 3.166
YEAR
R
2
0.9908
N 142
Table VI. Specication, multicollinearity and heteroscedasticity tests
Fixed Effects
H
0
Source Statistic Value Critical value
No Misspecication Ramsey (69) F 3.14 3.92
Multicollinearity Belsley et al. (80) CN 0.0007 10
Homoscedasticity Breusch and Pagan (80) LM 4.47 19.67
5.4. DISCUSSION
These results can be related to results reported in the literature. They give rise to a
number of conjectures.
An increase in population density increases emission density, although it does
so at a diminishing rate (see Figure 1). More people per square kilometre
indicates higher demand in energy-intensive domestic uses and, therefore,
more emissions per square kilometre. This scale effect is particularly
Table VII. Elasticity of emission density with regard to income related variables
EK
Income density D = 1, Z = 1 D = 1, Z = 0 D = 0, Z = 1 D = 0, Z = 0
min = 84580 21.3721 20.1510 17.2277 16.0630
mean = 1714600 21.4432 21.2352 16.2710 16.0630
max = 6910000 21.4762 21.7375 15.8017 16.0630
EC
Per capita income D = 1, Z = 1 D = 1, Z = 0 D = 0, Z = 1 D = 0, Z = 0
min = 937 22.9373 20.7956 19.2768 17.1155
mean = 12392 20.6682 20.7670 15.6263 15.7251
max = 29920 19.8936 20.7639 14.3802 15.2505
EY
Income D = 1, Z = 1 D = 1, Z = 0 D = 0, Z = 1 D = 0, Z = 0
min = 54530 10
5
2.6853 1.0394 3.3689 1.722
mean = 23336 10
7
0.70461 0.3273 0.67696 0.30065
max = 12130 10
8
2.192 0.92697 2.4522 1.1882
Table VIII. Turning points (income)
D = 1, Z = 1 D = 1, Z = 0 D = 0, Z = 1 D = 0, Z = 0
income 10689 10
7
94914 10
6
12447 10
7
13352 10
7
mean population 5288 4696 6158 6606
strong for population density levels close to the minimum of our sample
(12.82 inhabitants per square kilometre). For higher population density levels
economies of scale in populations energy demand and increased concern
about abating emissions at every level of development in densely populated
areas compensate part of the scale effect.
18
Emission density monotonically decreases with income density (see Figure 2).
The reason may be the change in the type and distribution of industry and
services in these economies. The pattern of emission changes when economies
move from heavy to light industry or from industry to services
19
Emission
density should decrease with the expansion of the service sector and the relo-
cation of smokestack industries. Several studies have explored the existence
of pollution havens (Lucas et al. 1992; Birdsall and Wheeler 1992; Low and
Yeats 1992; Copeland and Taylor 1994). There are no conclusive results, but
most of these studies consider the migration of industries with higher toxic
intensities as a plausible hypothesis.
But the change in the composition of the product is not the only reason
to explain the negative relationship between emission density and income
density. The shift into less polluting services and high technology industries
is often complemented by a directed effort to develop less polluting produc-
tion techniques. An empirical analysis of OECD data presented by Komen et
al. (1997) supports the notion that publicly supported research and develop-
ment aimed at environmental improvements increases with income. De Bruyn
(1997) nds that technological innovation is more important than structural
change in explaining sulphur emission reductions in the Netherlands and West
Germany.
Therefore, it seems that as society develops governments are called upon to
impose more stringent controls to protect the local environment. This leads
to a wider adoption of pollution abatement measures such as coal cleaning,
burning of low sulphur coals, ue desulphurization and dry scrubbing.
However, there is some degree of heterogeneity with regard to the speed
at which emission density decreases as the capital intensity of production
activities increases (see Table VII):
Downstream countries, that is, countries with more than 65% of local
emissions being deposited within national boundaries (D = 1) and with
a sulphur deposition density of more than 1.5 Tonnes per square kilo-
metre originated by foreign economic activities (Z = 1), show the highest
level (in absolute value) of elasticity of emission density with respect
to income density. These countries realise that pollution is an internal
problem, which generates strong incentives to speed up both the structural
transition from industrial activities towards services and the adoption of
abatement measures in the production process.
Environmentally sealed countries, that is, countries with more than 65%
of local emissions being deposited within national boundaries (D = 1)
and with sulphur depositions originated abroad amounting to less than 1.5
Tonnes per square kilometre (Z = 0), also show high levels of elasticity of
emission density with respect to income density. In fact, even though their
elasticities are lower than elasticities for downstream countries at the
lowest end in the income density range, elasticities grow faster with income
density for environmentally sealed countries. This result is consistent
with decision makers acting strategically. The stronger the link between
local economic activity and local environmental conditions the weaker the
local incentives to free-ride other countries abatement efforts.
Countries along the stream, that is, countries with less than 65% of local
emissions being deposited within national boundaries (D = 0) and with a
sulphur deposition density of more than 1.5 Tonnes per square kilometre,
originated from foreign economic activities (Z = 1), nd that as income
density rises further reductions are more costly and their local effect is
rather small due to the relatively important role played by other coun-
tries economic activities in determining local environmental conditions.
Thus, free-riding incentives are higher for this set of countries than for
the previous two subsets of countries and this explains why elasticities of
emission density with respect to income density are lower.
Finally, upstream countries, that is countries with less than 65% of local
emissions being deposited within national boundaries (D = 0) and with a
sulphur deposition density of less than 1.5 Tonnes per square kilometre
originating from foreign economic activities (Z = 0), show the lowest
level of elasticity of emission density with respect to income density. These
countries realise that any economic activity, either local or external, does
not have much impact on local environmental conditions. Thus, there are
few incentives to implement abatement measures. Reductions in emissions
are purely a consequence of the structural change that generally accom-
panies growth and are not spurred by the degradation of local environmental
conditions.
Emission density increases as per capita income rises (see Figure 3). This
result seems to contradict the general perception that higher per capita
incomes offer the relative luxury of caring about environmental quality.
However, there is an explanation. As mentioned before, environmental quality
has the properties of a public good and this generates problems of private
supply and free-riding of pollution abatement effort. In this situation it
is the role of governments to implement effective environmental protec-
tion. Governments can choose between direct regulation (command-and-
control approach) and indirect regulation (market based instruments). Unlike
production activities, consumption activities are not easy to regulate through
command-and-control regulatory approaches given the mobile nature of
such activities. But consumers are also very reluctant to accept market-based
instruments.
20
Thus, most controls regarding consumption-related emissions
are predominantly conned to regulation at point of production, which
means that governments fail to create the right incentives for consumers.
Consequently, it is hardly surprising to nd that emissions grow as consumers
purchasing power increases.
A similar insight has been drawn from the study carried out by Murdoch
et al. (1997) when comparing European nations actions to curb NO
x
and
sulphur emissions. They conclude that NO
x
is more difcult to control due
to the major share of emissions coming from a large number of small mobile
polluters (vehicles).
What is less intuitive is the fact that emission density grows faster in down-
stream countries than in upstream countries (see Table VII). This may have
an explanation, however. In downstream countries high energy consumption
may be a way to reduce individual exposure to air pollution. Air conditioning
is an example of energy-intensive ways to reduce individual exposure to air
pollution. This would also explain why those who suffer the problem do less
to reduce it (on a collective basis).
Finally, leaving aside partial EKCs subject to variation in individual sets of
income-related regressors and focusing in the total EKC with (log) income on
the horizontal axis, we nd that the inverted U-shaped relationship between
income and pollution holds for the four cases, but turning points for environ-
mentally sealed countries and downstream countries are located at higher
income levels than turning points for upstream countries and countries
along the stream (See Tables VII and VIII and Figure 4). This empirical
result is in line with the theoretical result presented in Ansuategi and Perrings
(2000): those countries who externalise a greater share of their emissions
will nd it more difcult to de-link economic growth from environmental
degradation.
6. Concluding Remarks
This paper addresses the relationship between income and sulphur emissions by
considering the transboundary nature of this type of pollutant. We have hypothe-
sized that past behavior in European countries may be represented by a Nash-type
pollution abatement strategy. Estimation of the model yields two different insights.
First, the prediction that nations that face more severe environmental pressure will
accompany economic growth with increased abatement in production is conrmed.
But, second, there has been no national strategic response to environmental
pressure in respect of consumption.
These results are consistent with those of Murdoch et al. (1997), where it is
demonstrated that a theoretical model of emission reductions with national stra-
tegic behavior yields reasonable empirical results for sulphur, but less satisfying
results for NO
x
. Murdoch et al. conclude that the reason why the model performs
worse for NO
x
is the fact that NO
x
emissions are generated by a large number of
small polluters whose uncoordinated actions call into question the unitary decision-
maker assumption at the national level. This explanation could also apply to our
results. Consumption activities are more difcult to control by the authorities
than production activities. Thus, the results for the relationship between emission
density and income density evidence a coordinated action at the national level and
strategic behaviour at the supranational level with regard to regulation of produc-
tion activities. In contrast, the results for the relationship between emission density
and per capita income reveal the lack of government control and the presence of
free-riding behavior at the infranational level with regard to consumption activities.
This greater role for strategic behavior at the local level helps understanding the
positive relationship between sulphur emissions density and per capita income.
Of course, the conclusions presented here rely on the assumption that emission
density and per capita income are good proxies of production and consumption
patterns respectively. We must also accept that the income-environment relation-
ship is unidirectional: that economic growth affects environmental quality but there
are no feedback-effects from the environment to economic growth.
21
But given
this, there are two implications of this analysis. For those who argue that economic
growth increases emission levels it shows that de-linking emissions from economic
growth is possible for local pollutants that are easily controlled by local govern-
ments. For those who argue that economic growth is the cure of environmental
problems, it shows that de-linking is less likely to happen when pollution is difcult
to control by local authorities and/or it can be easily externalized to other countries.
Acknowledgements
This work was partially supported by Research Project UPV 035.321-HA059/97
from the University of the Basque Country and Research Project HU-1998-
133 from the Basque Government. I benetted from useful suggestions of
C. A. Perrings, G. Halkos, R. Martnez Espieira and an anonymous referee.
However, I am responsible for any remaining errors.
Notes
1. Perrings and Ansuategi (2000) have employed conventional EKC methodology using other
development indicators such as the Human Development Index or the Integrated Poverty Index
and they have not found substantial changes in the results.
2. Murdoch et al. (1997) has been the only study where the transboundary nature of sulphur
emissions is taken into account as a determinant of abatement effort.
3. The oil-rening process that yields the fuels used in cars, trucks and aircraft removes most of
the sulphur in the crude oil. Hence, transportation represents a small percentage of the total
anthropogenic emissions of sulphur dioxide.
4. See, Amman and Kornai (1987), Amman (1990) and Halkos (1995) for further details on these
technologies.
5. We are assuming that in each country emission patterns in each square kilometre are a scaled
representation of national emissions.
6. The main reason for this simplifying assumption is that we are going to work with national
averages in the empirical part of the analysis and we want the model to t the data set. However,
this assumption will be partially relaxed in future development of this research by considering
intranational (NUTS 3 level) decision making units.
7. In order to simplify the analysis, we also consider the natural environment as another foreign
country.
8. Otherwise, it is possible to get some general insights working with simplifying assumptions
regarding preferences and technology as those made in Ansuategi and Perrings (2000).
9. We could simply use measures of both consumption and capital accumulation since those data
are available. However, we choose to proxy them through income data because we want to
produce results that are consistent with conventional EKC studies.
10. The set of countries comprises Austria, Belgium, Bulgaria, Denmark, Finland, France,
W. Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Netherlands, Norway, Poland,
Portugal, Romania, Spain, Sweden, Switzerland and Great Britain.
11. The lack of income data for Romania in years 1985, 1986 and 1987 and West Germany in years
1991 and 1992 forces us to work with an unbalanced panel of 142 observations.
12. The choice of thresholds to generate the D and Z dummy variables has been conditioned by the
size of the data set.
13. Murdoch et al. (1997) use a binary variable generated using Gastils (1989) index of civil liberties
and index of political freedom.
14. The dummy variable could be perfectly collinear with the xed effect, which would prevent
computation of the LSDV estimator.
15. Actually, there does not seem to be any justication to consider the xed effects as uncorrelated
with the other regressors.
16. Random effects estimators for the model including the dummy variable could be computed using
STATA. However, when asked to implement Hausmans specication test, such a test rejected
the random effects specication.
17. The panel regression results for equation (15) with emission density, per capita income and
income density expressed in logs shows a very high overall t (adjusted R
2
= 0.9907), although
four variables are statistically insignicant. These four variables are the square of income density,
the multiplicative term of the D dummy variable and income density, the multiplicative term of
the D dummy variable and per capita income and the variable representing the time trend. Thus,
we drop these four terms and run the regression again. The overall t of the model improves
only marginally (adjusted R
2
= 0.9908), but remaining variables become more signicant after
dropping those four terms.
18. The turning point for population density would be located at a level of 446 inhabitants per square
kilometre. However, our sample does not include observations with a population density level
higher than 407 inhabitants per square kilometre.
19. Note that a unit of land will probably render more income when devoted to services or high-tech
production activities than when devoted to heavy industry.
20. Public perception is such that people think that pollution is the sole responsibility of the
production sector.
21. The possibility of contemporaneous feedback from environmental degradation to economic
growth has been examined testing the null of exogeneity of the income variables. The test is
similar to the test used by Holtz-Eakin and Selden (1995) and Cole et al. (1997). This test is a
Hausman specication test where lagged income is used as the instrumental variable. Results
indicate that simultaneity is not present. However, the test used has low power to reject the null
of exogeneity.
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Economic Growth and Transboundary Pollution in Europe: An Empirical Analysis

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Economic Growth and Transboundary Pollution in Europe: An Empirical Analysis

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Environmental and Resource Economics 26: 305328, 2003.

2003 Kluwer Academic Publishers. Printed in the Netherlands.

(which can be interpreted as a signal of inappropriateness of the model).

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