Testing the load capacity curve for deforestation: A critical investigation using novel methods for the United States

Abstract

Understanding whether the relationship between economic activity and forest ecosystems entails a trade-off or synergy is crucial for sustainable development. Although the Environmental Kuznets Curve has been widely used to explore this dynamic, its reliance on demand-side indicators poses a notable limitation. In this regard, the Load Capacity Curve for Deforestation (LCCd) hypothesis provides a more comprehensive framework by simultaneously capturing the supply and demand aspects of environmental sustainability. Despite its conceptual relevance, empirical validation of the LCCd hypothesis remains highly limited. This study addresses this gap by examining the validity of LCCd for the United States from 1980 to 2022, employing a novel Augmented Autoregressive Distributed Lag approach. In addition, the analysis encompasses economic growth, financial development, trade openness, and urbanization. Results reveal a U-shaped relationship between economic growth and forest load capacity, confirming the LCCd hypothesis. While trade openness contributes positively to forest sustainability, financial development has a negative effect, and urbanization appears to be insignificant in the long run. Robustness checks support the main findings. Overall, this study provides pioneering empirical evidence in support of the LCCd hypothesis and underscores the importance of aligning financial development with environmental objectives.