Improving the Environment for a Greener Future
New Horizons in Environmental Economics series
Chapter 2: Energy Substitution and Carbon Dioxide Emissions
INTRODUCTION The role of economic growth in determining environmental quality has been explored in the last decade (for example, Copeland and Taylor, 2004). The environmental Kuznets curve (EKC) posits an inverted U-shaped relationship between environmental quality and per capita income (Grossman and Krueger, 1995). It is striking that the ad hoc parametric specifications of linear, quadratic, and cubic polynomials in GDP per capita have been used in the literature on EKCs (see Millimet et al., 2003). However, popular parametric applications have been criticized because different parametric specifications can lead to significantly different conclusions (Harbaugh et al., 2002; Stern, 2004). Although this concern has invoked recent papers using nonparametric techniques, there are few applications of nonparametric specifications (see Azomahou et al., 2006; Van and Azomahou, 2007; Auffhammer and Carson, 2008). This chapter studies carbon dioxide (CO2) emissions because they play a crucial role in the debate on sustainable development and climate change. While CO2 emissions are directly and positively related to the use of energy, reductions in energy use are not easy to effect because energy is a vital factor in the economy. The International Energy Agency (IEA) (2007) reported that if governments maintain their current policies, the world’s energy needs in 2030 will be more than 50 percent higher than they were in 2005. The IEA calls this the ‘reference scenario’. It forecasts that fossil fuels such as coal and oil will account for 84 percent of the increase in global energy consumption between 2005 and 2030. Coal is more...
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