Revisiting the Environmental Kuznets Curve in Nepal: Role of Energy Transition in Economic Growth

For decades, economists and environmental scientists have wrestled with a difficult question: can a country grow richer without ruining its environment? The prevailing theory, known as the Environmental Kuznets Curve, suggests a specific pattern. It proposes that when a nation is poor and just beginning to industrialize, its pollution levels rise as its economy expands. However, once that nation reaches a certain level of wealth, the trend reverses. At that higher income stage, societies tend to invest in cleaner technologies, enforce stricter rules, and shift toward less polluting energy sources, causing environmental damage to decline even as the economy continues to grow. This idea offers a hopeful roadmap for developing nations, suggesting that environmental recovery is an inevitable part of becoming wealthy, provided they can survive the initial messy phase of growth.

In the Himalayan nation of Nepal, a team of researchers decided to test whether this hopeful pattern actually holds true. Nepal is a country in the midst of significant change, with its energy demands rising alongside its economic growth. The researchers wanted to see if Nepal's journey followed the classic curve of rising then falling pollution, or if the reality was more complicated. They focused on the relationship between the country's economic growth, its use of energy, the speed of urbanization, its openness to international trade, and the amount of carbon dioxide it releases into the atmosphere. By looking at data spanning from 1980 to 2024, they aimed to understand if Nepal is currently in the phase where growth hurts the environment, or if it has already crossed the turning point where growth begins to heal it.

To find the answer, the team analyzed forty-four years of annual records, tracking how changes in one factor influenced the others over time. They looked closely at how carbon dioxide emissions per person moved in relation to the country's gross domestic product growth. They also examined the role of renewable energy, such as hydroelectric power, and how the rapid expansion of cities and the flow of goods across borders affected the air. The researchers used a statistical method designed to handle data that behaves differently over time, allowing them to separate short-term fluctuations from long-term trends. They also accounted for major shifts in the country's history, specifically identifying that the economic and environmental dynamics changed noticeably around 2012 and again in 2016, likely due to policy changes or structural shifts in the economy.

The results revealed a complex story that partially supports the hopeful theory but with important caveats. The analysis showed that in the long run, a one percent increase in Nepal's economic growth rate is associated with a small decrease in carbon dioxide emissions, specifically a drop of about 0.012 percent. This suggests that as the economy grows, there is a slight tendency for pollution to fall, perhaps due to more efficient practices. However, the researchers found that this relationship is not a simple, straight line. When they looked at the squared value of economic growth—a way of measuring if the effect gets stronger or weaker as the economy gets bigger—they found a tiny, positive rise in emissions. This indicates that while growth might eventually help, the path is not perfectly smooth, and the classic "inverted U" shape of the Environmental Kuznets Curve is only weakly visible in the baseline data.

The study highlighted that the type of energy used matters significantly. A one percent increase in the use of renewable energy was linked to a substantial 0.21 percent drop in carbon emissions. This finding strongly suggests that shifting away from fossil fuels and traditional biomass toward cleaner power sources is an effective way for Nepal to lower its environmental footprint. Similarly, the growth of urban populations was associated with a small reduction in emissions, roughly 0.043 percent for every one percent increase in urban growth. The researchers suggest this might be because cities allow for more efficient infrastructure and transport systems compared to scattered rural settlements.

However, not all factors worked in favor of the environment. The study found that increased trade openness, which measures how much a country imports and exports relative to its economy, was linked to a rise in emissions. For every one percent increase in trade openness, carbon dioxide emissions rose by 0.12 percent. This points to a "pollution haven" effect, where increased trade might bring in more industrial activity or reliance on imported goods that generate pollution, outweighing the benefits of economic integration. The data also showed that after 2016, the relationship between economic growth and emissions shifted. During this later period, the economic growth rate became positively associated with emissions, while the squared term became significantly negative, suggesting that the turning point of the Environmental Kuznets Curve may have been crossed only recently, after a period of structural reform.

The researchers concluded that Nepal is indeed on a path that aligns with the Environmental Kuznets Curve, but the journey is not automatic. The evidence suggests that the country has reached a stage where economic growth can eventually lead to lower emissions, but this outcome depends heavily on specific policies. The transition to renewable energy is a powerful tool for reducing pollution, while unchecked trade expansion could undermine these gains. The study confirms that the relationship between wealth and the environment is not a simple guarantee; it requires active management. For Nepal, the path forward involves continuing to prioritize clean energy and managing the environmental costs of trade and urbanization to ensure that economic prosperity does not come at the expense of the air its people breathe.