Testing the environmental Kuznets curve hypothesis in Iceland: 1960-2010.
Prueba de la hipotesis de la curva Kuznets ambiental en Islandia: 1960-2010
The change of global or regional climate compared to historical values is what is known as climate change. In recent decades, the constant pursuit of economic growth and indiscriminate consumption of energy resources by society has altered the climate balance of the planet; generating global consequences that affect different areas, both economic and social, to undermine health and safety of the population.
The reflected environmental pollution on global warming, the rising sea levels, acid rain, drought and other problems, it is mainly caused by emissions of C[O.sub.2] and other gases into the atmosphere. Carbon dioxide acts as a blanket for the planet earth, trapping heat from the sun and heating, but the excessive emission of this is completely harmful and their presence is due to deforestation and burning fossil fuels such as oil, coal and natural gas. Similarly other greenhouse gases like methane and nitrous oxide are released by farming practices, waste management and due to excess of these activities, the air is affected. Data from the International Energy Agency (iea, 2013) show that the concentration of C[O.sub.2] in the atmosphere for 2012 was 394 ppmv, representing an increase of 40 % compared to the levels of this gas during the 18th century.
One of the main theories to define the relationship between pollution and an economic growth is known as environmental Kuznets curve (EKC), which seeks to measure the relationship between economic development and environmental degradation, following an inverted U-shape; and thus compare the environmental contamination, determined by C[O.sub.2] pollution emissions, nitrous dioxide or other problem with the per capita income of a country, which is a measure of development. This theory is based on two main assumptions (1) more economic activity, increased number of releases (2) cleaner technology produces less pollution per unit produced (Grossman & Krueger, 1991). This means that as economic growth increases, pollution will increase, up to a point, where further growth will result in less pollution. According to the International Energy Agency in its journal Energy and Climate Change, 2014 was the first year where global C[O.sub.2] emissions related to energy have not increased, leading to the fulfillment of the EKC theory.
Significant amount of research that has been published, has tested the EKC hypothesis in single countries, and many of them have found that higher levels of income reduce environmental degradation (Beckerman, 1992; Sun, 1999) and therefore, an economic growth might be compatible and a requirement for environmental improvement if the correct policies are taken (Bhagawati, 1993; Dinda, 2004).
The argument behind EKC hypothesis is that when the levels of the economic development are low, the environmental contamination is restricted to the impacts of the economic activity; as economic growth accelerates with the development of the main activities of the primary sector as agriculture, livestock, fishing, among others and the improvement of industrialization, the rates of resource regeneration are lower than the rates of resource depletion, and thus the amount and toxicity of waste increase; when the levels of economic development reach a certain point, improvements in the dissemination of information to industries and services, along with rising environmental consciousness and better technology, lead to stabilize and gradually decrease environmental degradation (Panayotou, 1993).
Iceland is considered one of the greenest countries in the world, and by 2025 is expected to completely reduce the use of fossil fuels to generate energy in order to use cars with 0 % pollutant emissions; today 20 % of the cars are electric. Almost 100 % of the electricity used by its inhabitants is generated from hydropower, geothermal and other renewable energy sources; and as these sources produce inexpensive electricity, this country can cheaply supply its energy-intensive industry (Orkustofnun, 2013; Davidsdottir, 2007).
This country has great potential for the production of low-cost renewable energy; the geothermal power plants emit C[O.sub.2] in Iceland because of the volcanic magma degassing (Kauw et al., 2015). The main reason of it is because the country is benefited by its geographical location as it is situated in an area that not only has dozens of active volcanoes, but also has abundant springs which comes out steam and hot water, and it is from there where cleaner and cheaper energy is extracted; due to this cheapest way to generate energy, it has allowed Iceland to be able to develop export industries that depend on energy.
The Kyoto Protocol sets targets related to the reduction of emissions of greenhouse gases specifically for countries that have accepted to be part of those responsible for the increase in these emissions, such as the European Union and other 37 industrialized countries. This agreement was approved in 1997 but entered into force in 2005. Currently Iceland is part of the Kyoto Protocol and has joined the EU and Norway in reducing Greenhouse Gas (GHG) emissions about 30 % by 2020 compared with their status in 1990 (Government of Iceland, 2010).
In order to test the EKC hypothesis, this paper applies the Autoregressive Distributed Lag bounds testing to co-integration to analyze the relationships between C[O.sub.2] emissions per capita, GDP per capita in constant price (2005) us dollars, trade openness, and energy consumption from fossil fuels in the case of Iceland from 1960 to 2010; this confirms the presence of co-integration within the variables in long term. Moreover the results show that both production and consumption of fossil energy in Iceland have a direct and significant effect on the level of emissions of C[O.sub.2]; additionally the Granger causality test determines that per capita GDP causes C[O.sub.2] emissions. Finally this model supports that the theory of environmental Kuznets curve is met in Iceland.
This research paper is organized as follows: Section 2 provides information about the country to be analyzed; Section 3 is a literature review highlighting relevant previous studies on the subject; Section 4 details the theoretical framework and model to perform; section 5 defines the methodology that has been used for analysis; Section 6 shows the empirical results and Section 7 concludes.
Iceland is located in northwestern Europe and due to its location in the Mid-Atlantic Ridge, this country has a large volcanic and geologic activity which has allowed its climate is temperate and his environment is livable. In 2008 the economy has suffered an important misfortune, which involved the collapse of major financial institutions. Despite this, today Iceland has recovered, its GDP has had significant growth, investment and consumption have increased and unemployment has declined.
According to the Sustainable Governance Indicators (SGI) 2015 Survey, Iceland is ranking 26 internationally regarding to environmental policies. In the past, this country did not treat environmental policy as a top priority on its political agenda, but after the new government came to power in May 2013 led by Sigmundur David Gunnlaugsson, they took more actions on behalf of the country's nature and natural resources. In that year, the parliament approved a new law, Log um Natturuvernd N[D]60, which strengthened the legal framework for the protection of the natural environment; they also adopted a resolution which implemented aspects of the Master Plan Hydro and Geothermal Energy Resources in order to use this resources for power generation (SGI, 2015).
Iceland is considered a world leader in the use of renewable energies and in the treatment and control of environmental pollution, furthermore it is ranked highest (ranking 1) followed by Switzerland, Costa Rica and Sweden according to the Environmental Performance Index 2010 (Emerson et al., 2010). But the 2016 EPI Report shows that innovations have altered some rankings placing Iceland in second place followed by Sweden, Denmark and Slovenia, being Finland the top one (Hsu et al., 2016).
The long-term prospects are favorable for Iceland because it has abundant energy resources, rich fishing grounds, it is considered as a tourist destination and its current economic system has been improving. Currently Iceland depends on the ability to sustainably exploit marine and land resources and their ability to use hydro and geothermal energy. There are companies like Carbon Recycling International, which have taken advantage of the volcanic forces from the area so that the emission of carbon dioxide, considered an agent of climate change, ceases to be a problem and becomes a solution. This company has managed to obtain green fuel from C[O.sub.2] and has been able to market it, and thanks to the location of Iceland, this has abundant reserves of energy at low cost.
The country has been dedicated to improving the environmental public health, reduce and control emissions of greenhouse gases and increase reforestation. Much of Iceland's electricity comes from sustainable and clean sources, since the geothermal steam provides heating in buildings and a quarter of the electricity while the rest comes from hydropower; in 2001 the 95 % of the stationary energy and two-thirds of the total energy in this county come from these renewable energy sources (OECD, 2001). Iceland has been named as the cleanest country in the world, and even today, one of the primary and ambitious goals for the government to...