The carbon footprint of countries' production and imports: an Environmental Kuznets Curve approach

As unveiled by the literature that examines environmental quality along with economic development, growth is expected to bear different environmental consequences at different levels of income per capita. The widely-known Environmental Kuznets Curve (EKC) hypothesis suggests an inverted-U shaped relationship between per capita income and environmental degradation. One channel leading to this phenomenon is called the "composition effect" that arises from a shift in industrial sectors, i.e. from polluting manufacturing to cleaner sectors. Consequently, it is widely observed that countries that get richer have been relocating their polluting industries abroad. In this study, we focus on carbon footprint resulting from domestic production versus imports and analyse the factors that determine carbon footprint. Our sample consists of a cross-section of 146 high, middle and low income countries for the year 2006. Controlling for the effects of openness to trade, biological capacity, population density, industry share, energy use, and environmental regulation, we detect an EKC-type relationship between per capita income and carbon footprint of domestic production. On the other hand, carbon footprint of imports increases as income per capita grows.