The Effects of Economic Growth, Energy Consumption, Trade, Urbanization, and Financial development on CO2 Emissions in Canada

Abstract: A noteworthy cause of climate change is the amount of CO2 emissions released into the atmosphere. This study´s objective, therefore, is to examine the relationship between CO2 emissions, economic growth, energy consumption, urbanization, trade and financial development in the case of Canada, one of the largest CO2 emitters both in per capita and in absolute terms, over the period 1960-2014. For this purpose, this study applies both an ADF- and ZA-unit root test, an ARDL bounds testing approach to cointegration, a Granger causality test based on a VECM and lastly an innovative accounting approach. The results confirm that the variables are cointegrated and that GDP, GDP2, energy consumption, and trade expands CO2 emissions, in the long-run, whereas financial development and urbanization remain insignificant. The evidence, therefore, does not support the environmental Kuznets curve hypothesis since both GDP and GDP2 positively relates to CO2 levels. The causal analysis confirms that in the long-run, bidirectional causality is present between CO2 emissions and energy consumption, CO2 emissions and economic growth, as well as between economic growth and energy consumption. Moreover, the study confirms that urbanization, trade, and financial development all have bidirectional causal links with CO2 emissions. Therefore, to expect economic growth to solve environmental issues, as suggested by the environmental Kuznets curve, is in the case of Canada not correct. Instead, there is an urgency for financial support, targeted policies, and advanced technologies to develop the Canadian economy and its energy sector sustainably.