Production- and consumption-based emissions in carbon exporters and importers: A large panel data analysis for the EKC hypothesis

The Environmental Kuznets Curve (EKC) hypothesis has become a widely used framework for the investigation of the income-environment nexus. However, the literature in this field is biased toward the reliance on production-based carbon dioxide (CO2) emissions (PBE) as a proxy for environmental degradation. This production perspective ignores the carbon emissions embedded in trade, which are estimated to make up approximately a quarter of total global emissions. Therefore, the carbon leakage issue makes consumption-based CO2 emissions (CBE) accounting vital for better understanding the relationship between income and carbon emissions. In this study, we comparatively investigate the EKC pattern based on both PBE and CBE for a sample of 85 countries over the period between 1990 and 2020. In doing so, we investigate whether different emission accounting methods have an impact on the EKC pattern and examine how this impact differs depending on whether the countries are net importers or exporters of emissions embedded in trade. To this end, we first endogenously classify countries based on the club convergence approach proposed by Phillips & Sul [1] and obtain country groups such as those that are net exporters or importers of CO2 emissions. Using the system generalized method of moments (SGMM) estimator, we test the validity of the EKC hypothesis in the second step and identify the main driving forces behind the changes in PBE and CBE for each convergent club by controlling the effect of trade and urbanization. Therefore, for the first time, we compare the EKC hypothesis based on both PBE and CBE for a large sample of countries that are endogenously divided into different groups, and investigate the potential impact of alternative emission accounting approaches and the status of being net exporters or importers of CO2 emissions on the EKC pattern. The findings support the different patterns for PBE and CBE: while the EKC hypothesis is supported for both PBE and CBE for countries that are net importers of emissions, neither PBE nor CBE show an inverted U-shaped relationship with income for countries that are net exporters of emissions. These results strongly support the need for coordination in policies to reduce CO2 emissions between importers and exporters of hydrocarbons and energy-intensive goods.