Reconsidering the Environmental Kuznets Curve hypothesis: the trade off between environment and welfare

Past climate change literature paid great attention to the welfare analysis of international agreements that stabilize emissions over time on the basis of the New Welfare Economics approach claiming “objective” measures of well-being and excluding interpersonal comparisons. In this paper, by using non-New Welfare Economics approaches we show that the involvement of developing countries is not a desirable policy option. On the other side the implementation of a “Kyoto forever” scenario including only developed regions is recommended because it improves both environment and welfare but does not generate a turning point in the Pollution-Income Relationship (PIR). The Environmental Kuznets Curve (EKC) hypothesis implies that a bell shaped PIR would induce policy-makers to pursue economic growth in order to overcome the air pollution issue. Our analysis shows that when we introduce a welfare analysis, policy implications based only on the turning point existence and consequently on the EKC hypothesis could be misleading. In our study a “win-win” policy as the Kyoto Protocol is recommended and emissions stabilizing policies generating a turning point including developing countries could be heavily paid in terms of welfare. However results are sensitive to the choice of the welfare measure.