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This paper presents the results of an investigation of the causality issue of incomeemission relationship based on time series econometric techniques of unit root test, cointegration and related error correction model for a panel data set. Here, the nature of causality between per capita CO 2 emission (PCCO2) and per capita GDP (PCGDP) has been examined using a cross country panel data set covering 88 countries for the period 1960 -90. Using the panel unit root test procedure of Im et al. (1997) (IPS), we have found that the hypothesis of unit root (i.e., non-stationarity) of the time series of PCGDP and PCCO2 can not be rejected for individual country groups. As both the variables are found to follow I(1) process, we next have performed the panel data co-integration test and finally, we have estimated the ECM (for these country groups for which significant income-emission cointegration was obtained) to explore the nature of dynamics implicit in the given panel data set. Our findings suggest that there is more or less a bi-directional causal relationship between income (PCGDP) and CO 2 emission (PCCO2) for Africa, Central America, America as a whole, Eastern Europe, Western Europe, Europe as a whole and the World as a whole. That means, the movement of the one variable directly affects the other variable through a feedback system. Thus, the policy makers should be cautious to make proper decision about the control of emission level.JEL Classification: C33, O40, and Q25.

This study has been observed an inverse (and sometimes U-shaped) relationship between environmental degradation and per capita real income as opposed to the inverted U-shaped environmental Kuznets curve (EKC) found in many earlier studies. It was felt that a possible explanation of the observed pattern of relationship might be sought in the dynamics of the process of economic growth experienced by the countries concerned. Economic development may strengthen the market mechanism as a result of which the economy may gradually shift from non-market to marketed energy resources that are less polluting. This phenomenon may show up in the form of an inverse relationship, as mentioned above. Also, due to the global technical progress the production techniques available to the countries all over the world are becoming more and more capital intensive and at the same time less polluting. This may mean that, given the income level, the pollution level decreases as the capital intensity of an economy rises. In the present study, it is indeed observed that as capital intensity increases the level of suspended particulate matter (spm) in the atmosphere decreases. Per capita real income is also found to be inversely related to spm partially, but the interaction effect of per capita income and capital-intensity on spm is observed to be positive. This suggests that, given the level of per capita income (capital intensity), a more capital-intensive production technique (a higher per capita income level) would cause less pollution. For spm a surprising result is also obtained, i.e. a U-turn is observed at a very high level of per capita real income (i.e. ~US$12 500 at 1985 US prices). This is possibly indicative of the fact that there are technological limits to industrial pollution control such that beyond a threshold level of income further rise in income cannot be achieved without environmental degradation.

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