The Right Policies Can Separate Economic Growth from Pollution
While emerging economies primarily experience rising CO2 emissions with growth, and high-income nations see declining emissions, actions such as addressing income inequality, promoting sustainable tourism, investing in alternative energy, and encouraging reforestation can shift this dynamic towards sustainability.
Climate change has reignited the debate on the relationship between economic activity and environmental degradation. Continued economic growth is essential for eradicating poverty and creating prosperity for all, but rising global temperatures and increasingly frequent extreme weather events have created new challenges to development.
Are economic growth and environmental protection mutually exclusive?
In a recently published ADB Economics Working Paper, we address this question by investigating the so-called Environmental Kuznets Curve hypothesis. This posits that the relationship between pollution and Gross Domestic Product (GDP) per capita follows an inverted U-shaped curve.
In the early stages of economic development, industrialization boosts growth but also polluting emissions—typically proxied by per-capita CO2 emissions. As a result, environmental conditions worsen alongside rising per-capita GDP. Beyond a certain threshold, however, higher incomes become associated with increasingly lower emissions.
Simply put, as countries develop, they initially experience increased pollution, but after reaching a certain income level, their emissions begin to decline.
Among the possible explanations for this are that less-polluting services activities increasingly outweigh industry, technology becomes greener, and environmental protection measures are adopted.
So, what does the data tell us?
As countries develop, they initially experience increased pollution, but after reaching a certain income level, their emissions begin to decline.
Our results confirm that there exists a statistically significant relationship between economic growth and CO2 emissions. However, contrary to the original theory, we find that the Environmental Kuznets Curve is not a simple inverse U-shape, but instead has an inverted-N shape and, thus, two turning points.
The estimated minimum and maximum points of the curve produce a clearcut distinction between emerging and advanced economies. Almost all emerging economies are located on the upward segment of the Environmental Kuznets Curve, where economic growth is linked to increasing per capita CO2 emissions. In contrast, only high-income economies are located on the downward-sloping part of the curve beyond the estimated maximum point.
Importantly, our results indicate that, aside from economic growth, other factors play a significant role in shaping CO2 emission dynamics. Unsurprisingly, these include fossil fuel energy consumption and the share of industry in GDP, but also income inequality—all of which are found to boost emissions.
The finding of an inverted N-shaped Environmental Kuznets Curve also holds for other pollution measures and environmental indicators—such as nitrogen oxides, primary particulates, and ecological footprint—and the estimates are consistent with very similar threshold values for the minimum and maximum values of the curve.
Our results carry significant policy implications, particularly for developing countries in Asia and the Pacific. The region emitted about 48% of global greenhouse gas emissions in 2022, excluding emissions from land use change and forestry. At the same time, it is the main engine of the world economy.
For instance, projections from the International Monetary Fund imply that this year and the next Asia and the Pacific will account for about 60% of global growth. The region is also home to a third of the world population, 3.9% of which (155.2 million people) still lived in extreme poverty in 2023.
As such, the trade-off between growth and environmental protection is intensely felt in the region. It is no surprise that many believe the fight against climate change will be won or lost in Asia and the Pacific. In this respect, our analysis suggests that this fight can be won—and sheds some light on the how.
The bad news is that the process of economic development cannot be easily separated from environmental degradation. All else constant, beyond very low per-capita GDP levels economies can be expected to move along the classic inverted U-shaped curve as they grow wealthier.
All else, however, need not stay constant. Our findings indicate that, among others, policy actions tackling income inequality; promoting sustainable international tourism and agricultural activities; increasing investment in alternative energy sources; and incentivizing reforestation can all lead to reductions in CO2 emissions.
These measures will impact the relationship between economic growth and pollution by shifting the Environmental Kuznets Curve downward, so that the same per-capita GDP level will be associated with lower environmental damage.
With the right policies in place, economic growth need not entail significant trade-offs with environmental sustainability.
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