Green Natural Capital, the Environmental Kuznets Curve and Development Financing in the Global South

Developing countries, home to the most economically disadvantaged populations vulnerable to climate change, are under pressure to reduce carbon dioxide (CO₂) emissions to minimize damage from environmental externalities. The amount of CO₂ emissions is highly unequal among countries, both in historically cumulative terms and in current per capita terms. Historically, rich and developed countries have been the largest contributors to CO₂ emissions. The respective shares of low-income and most middle-income countries in global historical accumulation are negligible.

Along with the call for climate justice, promoting green transformation for sustainable growth and minimizing the trade-off between environmental degradation and economic growth has been on top of the development agenda in the Global South. What are the feasible policies to minimize the negative environmental externalities without harming economic development?

In a new journal article published in iScience, Yan Wang and Yinyin Xu investigate the circular relationship between CO₂ emissions, economic development and development financing in developing countries by re-examining the Environmental Kuznets Curve (EKC) hypothesis using a panel dataset for 76 developing countries from 1995-2018. They find that the accumulation of renewable natural capital (RNC) and the adoption of renewable energy have proven effective in improving environmental conditions in the tested countries. In addition, concessional lending from bilateral and multilateral banks was not found to be associated with CO₂ emission changes or economic growth in various model specifications during the sampled period.

The authors argue that the EKC relationship provides insights into some possible aspects for channeling future development finance for sustainable growth, such as investment in human capital and green natural capital. They recommend that the development partners consider investing in green natural capital such as forest, farmland, pastureland, mangroves, agriculture biomass and scalable renewable energy adoption. At the same time, they argue that waged employment and technological spillover should be encouraged in these projects to enhance human capital through recruitment and training. The advantage of these investments is that these projects are likely to be small, labor- and tech-intensive and thus, more likely to reach results without incurring large amounts of debt.

A previous version of this journal article was published as a working paper in July 2023.