JultikaUniversity of Oulu repository

The relationship between the environment and the economy is broad, and it invites careful analysis and attention. Which explains why this thesis seeks to examine the impact of economic growth on environmental quality. Meanwhile, the concern that gave rise to this topic is the strategy adopted by developed countries in their early growth stage which was to “grow rich first and clean up later”. The theoretical framework on which this thesis stands is the Environmental Kuznets Curve (EKC) which suggests that environmental degradation first increase, then level off, and decrease as economic growth takes place. In other words, there is an inverted-U shaped relationship between economic growth and the environment. Past studies have shown that not all environmental problems follow this inverted-U curve model and some others have gone further to suggest alternative models to explain the nexus between the environment and the economy such as overlapping generation’s model and Commoner-Ehrlich equation model, which were reviewed in this thesis. Our goal was to assess whether economic growth positively contributed to environmental quality and assess the validity of the inverted-U curve model. The empirical investigation was carried out using panel data from 70 countries spread between high, middle and low-income countries as classified by the World Bank and period coverage between 1998 to 2013. This thesis uses CO₂ emissions per capita as a proxy for environmental quality. Furthermore, two-ways fixed effect estimator was used in the econometric analysis to account for country and time specific effects in the model, and joint F statistic test was employed to test the statistical significance of the model used and justify the inclusion of the quadratic and cubic transformations of GDP per capita. This thesis discovers a slight improvement in environmental quality after episodes of environmental degradation, which somewhat agrees with the EKC hypothesis. However, disaggregation of our data indicates increase in CO₂ emissions for high-income countries after episodes of reduction, a stark contrast to the position of the EKC. The non linearity of the relationship between GDP per capita and CO₂ emission reflects how complicated and unstable environmental problems can be. This result can significantly help policymakers to be proactive in managing the environment.