CO2 emissions and sustainable economic development: New evidence on the role of human capital

The empirical literature testing the Environmental Kuznets Curve hypothesis reports mixed results on the existence of this relationship. This study argues that the effects of economic development on CO2 emissions are contingent upon the level of human capital. In the beginning, when human capital starts increasing from its low levels, more education accelerates the use of non‐renewable resources and increases pollution emissions. However, when certain threshold levels of schooling are traversed, further enrollments reduce CO2 emissions by promoting environmental awareness and facilitating the use of environment friendly technologies. To test these competing possibilities, we rely upon an innovative threshold technique where income–pollution relationship is piecewise linear with human capital serving as regime switching trigger. Our empirical findings using a large sample of 122 economies over the period 1980 to 2014 support the contingency effects of human capital in the income–environment relationship. These results are also supported by our findings from cross‐sectional regressions in the presence of multiplicative interaction term of income and human capital. Based on these results we argue that an increase in education is necessary for reducing the environmental degradation and ensuring the sustainability of economic development.