Long Run Emission-Growth Nexus: An Empirical Evidence

Abstract: This study presents an empirical investigation of i) testing the Granger Causality between economic growth and aggregated carbon dioxide (CO2) emission; and economic growth and disaggregated CO2 emission from burning fossil fuel coal, oil and natural gas respectively; ii) the potential impact on economic growth if countries substitute CO2 emission from dirty energy, coal, by emission from relatively cleaner energy oil and natural gas. I undertake panel analysis of 30 countries and separate time series analysis for China, United States and United Kingdom during 1960-2010 sample years. The causal relationship between variables has been examined by using a VAR in first differences framework. The results from panel countries show ‘Feedback’ relationship in all cases except an ‘Unidirectional’ causality running from economic growth to CO2 emission from coal. In country level analysis, there is no evidence of causality between economic growth and aggregated emission, whereas a significant ‘Unidirectional’ causality has been found running from economic growth to emission from coal in highest emitter China and United States. This relevant and expected finding imply that higher GDP growth in China and United States cause higher emission in environment, however, we do not find such relationship for the case of United Kingdom. Utilizing Wald test with linear restriction I found that countries will be environmentally benefited, if they substitute emission from coal by that of oil and natural gas, as if they substitute coal consumption by oil and natural gas consumption. But how much GDP would have to forgo for substituting coal by oil and natural gas is a matter of conflict between capitalists and environmentalists and therefore, deserve further research.