Revisiting heterogeneity in the relationship between <scp>CO₂</scp> per capita emissions and income per capita

Abstract This study applies various methods to deal with sources of potential misspecification in the drivers of CO 2 per capita emissions within an environmental Kuznets curve (EKC) framework. The proposed methodologies are as follows: (i) Bayesian model averaging analysis as a remedy for omitted variable bias due to model uncertainty, (ii) convergence club analysis to endogenously classify a large size of panel of countries as a remedy for unobserved heterogeneity, (iii) inclusion of lagged regressors as a remedy for simultaneity. The empirical findings show that the EKC is holding for all except for the first group with the highest (or fastest) long‐term income trajectories. Moreover, one observes a clear negative impact of renewable energy consumption, a general positive impact of financial development, and no impact of institutions on emissions. Finally, the findings highlight the importance of constructing homogeneous country clusters.