What drives the long-term relationship between economic development and environmental quality? The role of spatial dispersion vs. agglomeration

Abstract

The dramatic improvement in air quality in major Chinese cities in recent years has led to renewed interest in the question of whether economic development allows a country to “grow” out of its environmental problems. We shed new light on this question by identifying a new factor that can drive the long-term relationship between economic development and environmental quality, namely, a spatial effect that arises from a tradeoff between environmental quality and agglomeration economies. We show theoretically that this spatial effect can lead to an inverted U-shaped relationship between income and pollution, i.e., an environmental Kuznets curve. In addition, we decompose changes in US air pollution concentrations from 1990 to 2017 to allow for a possible spatial effect. Results point to the potential importance of a spatial effect in explaining the reductions in carbon monoxide (CO) concentrations. However, little of the change in sulfur dioxide (SO₂) concentrations in the US can be attributed to a potential spatial effect.