Atmospheric pollution and economic development in small states : the role of governance

Abstract

This dissertation examines the relationship between carbon dioxide (CO2) emissions and economic development for small states worldwide, focusing in particular on the role played by governance in this regard. More specifically, this dissertation considers an extended Environmental Kuznets Curve (EKC) framework that incorporates various facets of good governance, with the purpose of capturing the extent to which such considerations can assist or hinder environmental protection within the context of small states. Panel data analysis is employed for a sample of 34 small states over the period 2002-2015, incorporating Gross Domestic Product (GDP) per capita levels together with six key governance measures, as set out by the World Bank, using both Random and Fixed Effects models. Preliminary results of the conventional EKC model confirm the existence and validity of the hypothesised inverted U-shape relationship between emissions and income for the sample of small states under review. Additionally, results also showed that the rule of law within a country, including protection of property rights and the perceived quality of public institutions, is a key player in environmental protection, manifesting a statistically-significant and negative relationship with CO2 emissions across different econometric specifications. This study also looks at the turning point level of income, which is the average level of GDP per capita beyond which CO2 emissions start to decline in the EKC setting. Results show that while in the traditional EKC regression model the turning point level is around $45,000, which is already beyond the income level of the majority of small states in the sample, the inclusion of the governance indicators increases this turning point to around $115,133, an almost two-fold increase, thus effectively shifting the traditional EKC. The results suggest that governance, and in particular rule of law, is crucial to environmental improvements in small states, as it reduces the level of economic development required to bring about decreases in CO2 emissions. Furthermore, the findings also emphasise the importance of private and voluntary initiatives to complement regulation and enforcement, given small states’ well-documented issues with prohibitively-high implementation costs due to indivisibilities and lack of economies of scale.