Economic development and environmental quality: A reassessment in light of nature's self-regeneration capacity

We study the relationship between economic development and consumption of natural resources using a vintage capital model. Consumption of natural resources is assumed to generate pollution, part of which will be absorbed by nature's self-regeneration capacity. We find that during the transition dynamics, the shape of the pollution output relationship will depend on the parameter determining nature's self-regeneration capacity. Using footprint and biological capacity data, we show empirically in a repeated cross-section of countries that the shape of the pollution-output relationship indeed depends on countries' capacity to regenerate part of the resources they consume from nature.