Does Higher Per Capita GDP Reduce CO 2 Emission? Evidence on the Environmental Kuznets Curve for India

Abstract

Utilising time-series data covering the period 1971–2021, this study explores the validity of the environmental Kuznets curve (EKC) for India, considering carbon dioxide (CO₂) emission as the benchmark for environmental degradation and gross domestic product (GDP) per capita as a measure for economic development. Additionally, foreign direct investment (FDI) has been incorporated as a control variable in the EKC framework to capture the extent to which FDI affects environmental quality. The income–pollution relationship is examined through the notion of co-integration using the autoregressive distributed lag approach. The long-run estimates indicate significant evidence of the EKC hypothesis for CO₂ emission in India. Regarding the variable FDI, the validity of the pollution haven hypothesis is established. However, the short-run effects vary significantly for both GDP per capita and FDI. Interestingly, a short-term fluctuation in GDP is reported to have a non-linear (U-shaped) impact on CO₂ emissions, which is indicative of the presence of technological constraints to abate pollution beyond a certain income level. Again, the short-run fluctuations in FDI can significantly improve environmental quality. However, in the presence of an error-correction mechanism (ECM), such deviations from the equilibrium long-run relationship are short-lived, and the system will converge to the long-run equilibrium path.