Testing the Environmental Kuznets Curve Hypothesis in North America’s Free Trade Agreement (NAFTA) Countries

Abstract

In force since 1994, the North American Free Trade Agreement (NAFTA) is still the most comprehensive agreement ever developed, conforming to the world’s largest trade market. However, the environmental impacts cannot be neglected, particularly greenhouse gas emissions. The environmental Kuznets curve (EKC) hypothesis is revisited, studying Canada, Mexico, and the U.S.A. in relation to carbon dioxide (CO2) emissions, gross domestic product (GDP), energy, and exergy consumption. Ordinary least squares, vector autoregression, and Granger causality tests are conducted. Additionally, exergy indicators and the human development index (HDI) are proposed. Results for Mexico and the U.S.A. describe similar and interesting outcomes. In the search of the environmental Kuznets curve (EKC), the EKC hypothesis is confirmed for Mexico and the U.S.A. However, for Canada, the EKC hypothesis does not stand. The Granger causality test displays the existence of a uni-directional causality running from CO2 emissions to economic growth; a similar behavior was observed while testing the for the exergetic control variables. The most intriguing Granger causal results are those from the U.S.A. A bidirectional relation was observed between exergy intensity and CO2 emissions. Moreover, the EKC curve was plotted by both variables. Furthermore, Mexico’s outcomes reveal that increasing renewable exergy share will decrease CO2 emissions. On the contrary, increasing HDI will grow CO2 emissions. Policy implications arise for NAFTA countries to minimize CO2 emissions by means of the growing renewable energy share. Exergy tools offer an appealing insight into energetic and environmental strategies.