Transboundary Externalities in the Environmental Transition Hypothesis

Abstract

The Environmental Kuznets Curve (EKC) is a hypothesis which implies that it is possible to "grow out of environmental degradation." Most theoretical models of the EKC relation have not accounted for transboundary and intergenerational externalities, nor have empirical studies provided evidence that validates an inverted U shaped relation between environmental degradation and economic growth for pollution problems where the effects are far-displaced or long-delayed. This paper integrates the theory of transboundary externalities into the most common theoretical framework applied to the EKC hypothesis. It shows that where a significant proportion of environmental impacts of economic activity occurs outside the territories in which those activities take place, the de-linking of growth and environmental degradation is less likely to happen. This proposition is demonstrated by assuming that decisionmakers have a Nash-type non-cooperative strategic behavior.