Revisiting the Environmental Kuznets Curve in a Global Economy

TLDR: In this paper, an empirical investigation between CO2 emissions, energy intensity, economic growth and globalization using annual data over the period of 1970-2010 for Turkish economy was carried out using unit root test and cointegration approach in the presence of structural breaks.

Abstract: The present study deals with an empirical investigation between CO2 emissions, energy intensity, economic growth and globalization using annual data over the period of 1970–2010 for Turkish economy We applied unit root test and cointegration approach in the presence of structural breaks The direction of causality between the variables is investigated by applying the VECM Granger causality approach Our results confirmed the existence of cointegration between the series The empirical evidence reported that energy intensity and economic growth (globalization) increase (condense) CO2 emissions The results also validated the presence of environmental Kuznets curve (EKC) The causality analysis shows bidirectional causality between economic growth and CO2 emissions This implies that economic growth can be boosted at the cost of environment

Figures

Table 1. Summary of studies on Turkey

Table 7. Long-and-Short Run Analysis

Table 2. Descriptive Statistics and Correlation Matrix

Table 4. Results of ARDL Cointegration Test

Figure 1. Plot of Cumulative Sum of Recursive Residuals

Figure 2. Plot of Cumulative Sum of Squares of Recursive Residuals

Full text

Munich Personal RePEc Archive
Revisiting the Environmental Kuznets
Curve in a Global Economy
Shahbaz, Muhammad and Ozturk, Ilhan and Afza, Talat and
Ali, Amjad
COMSATS Institute of Information Technology, Lahore Campus,
Cag Universit, COMSATS Institute of Information Technology,
Lahore Campus, National College of Business Administration
Economics
5 April 2013
Online at https://mpra.ub.uni-muenchen.de/46610/
MPRA Paper No. 46610, posted 29 Apr 2013 08:14 UTC

1
Revisiting the Environmental Kuznets Curve in a Global Economy
Muhammad Shahbaz
Department of Management Sciences,
COMSATS Institute of Information Technology,
Lahore, Pakistan. Email:
shahbazmohd@live.com
Ilhan Ozturk
Faculty of Economics and Administrative Sciences,
Cag University, 33800, Mersin, Turkey.
Email: ilhanozturk@cag.edu.tr
Tel & Fax: +90 324 6514828
Talat Afza
COMSATS Institute of Information Technology,
Defence Road, Off Raiwind,
Lahore, Pakistan, Email: talatafza@ciitlahore.edu.pk
Amjad Ali
School of Social Sciences
National College of Business Administration & Economics
40/E-1, Gulberg III, Lahore-54660, Pakistan
Email:
chanamjadali@yahoo.com
Abstract: The present study deals with an empirical investigation between CO
2
emissions,
energy intensity, economic growth and globalization using annual data over the period of 1970-
2010 for Turkish economy. We applied unit root test and cointegration approach in the presence
of structural breaks. The direction of causality between the variables is investigated by applying
the VECM Granger causality approach. Our results confirmed the existence of cointegration
between the series. The empirical evidence reported that energy intensity, economic growth
(globalization) increase (condense) CO
2
emissions. The results also validated the presence of
Environmental Kuznets curve (EKC). The causality analysis shows bidirectional causality
between economic growth and CO
2
emissions. This implies that economic growth can be
boosted at the cost of environment.
Keywords: Carbon dioxide emissions, EKC, economic growth
JEL classification: C32, O4, Q56

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1. Introduction
Turkey has experienced a significant rise in economic growth, energy consumption and
carbon emissions during the last two decades. Turkey is a candidate for full membership of
European Union (EU) and therefore is likely to face significant pressures from EU during
negotiations to introduce its national plan on climate change and global warming along with
specific emissions targets (Ozturk and Acaravci, [1]). Turkey is one of the important countries
which have a high carbon emission and economic growth in the world. The reports of World
Bank and UNDP indicate that CO
2
emissions would rise more than six-fold by the end of 2025
rather than 1990s, so it is a great challenge for Turkey to achieve both the targets of high
economic growth and less CO
2
emissions at the same time.
The present study contributes in energy economics by four ways: (i), we augmented the CO
2
emissions function by incorporating globalization as potential determinant of energy intensity,
economic growth and CO
2
emissions; (ii) Zivot-Andrews [2]) unit root test has been applied in
determining integrating order of the variables; (iii) Gregory-Hansen structural break
cointegration test is used to examine the robustness of long run relationship between the
variables and (iv), direction of causal relation is investigated by applying the VECM Granger
causality test. Our findings confirm the existence of long run relationship between economic
growth, energy intensity, globalization and CO
2
emissions. We find that the EKC is validated in
case of Turkey. Moreover, energy intensity, major contributor to CO
2
emissions, and
globalization improves the environmental quality. The feedback effect exists between economic
growth and CO
2
emissions. Energy intensity and globalization Granger causes CO
2
emissions.

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The rest of the paper is organized as follows: section-II presents review of literature; section-
III provides data information, modeling and estimation strategy; result interpretations are in
section-IV and section-V deals with conclusion and policy implications.
II. Literature Review
In 1991, Grossman and Krueger started the debate of Environmental Kuznets curve
(EKC) which explained the relationship between environmental pollution and economic growth
i.e. inverted U-shaped relationship. Later on, a series of debate has started by investigating the
relationship between environmental pollution and economic development. Johansson and
Kristrom [3] noted that the literature on EKC is not enough and this topic needs more empirical
investigation. But Stern [4] argued the issues of EKC should be revisited by using new models
and new decompositions with different panels and time series data sets. Similarly; Wagner [5]
pointed out that the data on per capita CO
2
emissions and per capita GDP are not stationary in
time series framework and this problem is not sufficiently addressed in literature. Therefore,
many dimensions of EKC are available for further empirical investigation.
Existing literature provides two strands of relationship between energy consumption and
energy emissions i.e. economic growth and energy consumption and, economic growth and CO
2
emissions in case of Turkey (see Ozturk, [6]) for literature survey on energy-growth nexus). For
example; Altinay and Karagol [7] investigated the direction of causality between energy
consumption and economic growth. They applied unit root test to examine stationarity properties
of the variables. The Hsiao Granger causality was applied using time series data over the period
1950-2000. Their empirical exercise reported neutral effect between economic growth and
energy consumption. Lise and Montfort [8] probed the relationship between gross domestic

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product and energy consumption using annual data for the period of 1970-2003. The Granger
causality analysis found unidirectional causality running from economic growth to energy
consumption.
Soytas and Sari [9] analyzed the relationship between energy consumption in industrial
and manufacturing sectors using multivariate model by incorporating capital and labor in
production function. Their results indicated cointegration between the variables for long run
relationship. The results of vector error correction (VECM) model reveal that there is
unidirectional causality running from energy consumption to manufacturing GDP. Furthermore,
the results of variance decomposition and generalized impulse response analysis confirmed that
energy consumption is an important factor of manufacturing GDP. This implies that utilization of
energy saving modes and energy efficiency technology may enhance manufacturing production
in Turkey. Similarly; Jobert and Karanfil [10] reinvestigated the relationship between energy
consumption and economic growth at aggregate level and at sectoral industry level. Their results
reported that there is no causality between both variables at aggregate level as well as sectoral
level.
Erdal et al. [11] used the data over the period of 1970-2006 to reexamine the relationship
between energy consumption and real GNP. They applied augmented Dickey-Fuller (ADF) and
Philips-Perron (PP) unit root tests to test stationarity properties of both variables and Johansen
cointegration for long run as well as Granger causality test for pair-wise causality. The empirical
exercise reported the cointegration between energy consumption and real GNP. The causality
analysis revealed feedback effect implying that economic growth and energy consumption are
interdependent. This suggests that any negative energy shock will put negative effect on
economic growth of Turkey. Kaplan et al. [12] reexamined the causal relationship between

Frequently asked questions

Q1. What contributions have the authors mentioned in the paper "Revisiting the environmental kuznets curve in a global economy" ?

The present study deals with an empirical investigation between CO2 emissions, energy intensity, economic growth and globalization using annual data over the period of 19702010 for Turkish economy. The empirical evidence reported that energy intensity, economic growth ( globalization ) increase ( condense ) CO2 emissions. 

Q2. What are the future works mentioned in the paper "Revisiting the environmental kuznets curve in a global economy" ?

For future research, renewable and non-renewable energy sources of energy can be incorporated in neo-classical production to examine the relationship between energy consumption and economic growth following Shahbaz et al. [ 51 ] and Leitão [ 52 ] by incorporating the globalization. Globalization is a potential determinant of economic growth and energy consumption. 

Q3. What is the effect of globalization on the environment?

Globalization improves the total factor productivity by increasing trade activity but also boosts economic activity via foreign direct investment and transfer of advanced technology from developed countries to developing nations. 

Q4. What is the causality analysis of the EKC hypothesis?

The causality analysis found neutral effect between energy consumption and economic growth, economic growth and CO2 emissions and, energy consumption and CO2 emissions. 

Q5. What is the significance of the results?

The results intend that linearand nonlinear terms of real GDP per capita have positive and negative signs (inverted-U shaped relation) on CO2 emissions and are statistically significant at 1% level of significance. 

Q6. What is the need of empirical investigation of environmental Kuznets’s curve in Turkey?

There is need of empirical investigation of sectoral environmental Kuznets’s curve in Turkey to improve environmental quality and for sustainable economic development in long run. 

Q7. What is the significance of the short run model?

Sensitivity analysis indicates that short run model passes all diagnostic tests i.e. LM test for serial correlation, ARCH test, normality test of residual term, white heteroscedasticity and model specification successfully. 

Q8. What is the test used to determine the causality between the variables?

After examining the long run relationship between the variables, the authors use the Grangercausality test to determine the causality between the variables. 

Q9. What is the effect of trade openness on environmental quality?

In case of China; Dean, [32] reported that trade openness deteriorates environmental quality via improved terms of trade, however, rise in income saves environment from degradation. 

Q10. What is the method to investigate the existence of long run relationship between economic growth, energy intensity?

The authors employ the autoregressive distributed lag (ARDL) bounds testing approach tocointegration developed by Pesaran et al. [44] to explore the existence of long run relationship between economic growth, energy intensity, globalization and CO2 emissions in the presence of structural break. 

Q11. What is the effect of inverse term of real income per capita on CO2 emissions?

This shows that a 1% increase in real income per capita is linked with 7.3502% increase in CO2 emissions and inverse effect of squared term of real income per capita indicates the delinking point of CO2 emissions i.e.-0.4332, once an economy achieves threshold level of real income per capita. 

Q12. What is the result of the Gregory-Hansen cointegration test?

Table-6 reports the results of GregoryHansen cointegration and the authors find cointegrating single vector once the authors use economic growth, globalization and CO2 emissions as forcing variables. 

Q13. How many observations are there in the table?

The results reported in Table-4 noted that lag 2 is sufficient for such small sample data having only 40 observations (see third row of Table-4). 

Q14. What is the effect of energy consumption on CO2 emissions?

All else is remaining the same, a 1% increase in energy consumption raises CO2 emissions by 0.7155%which shows that energy consumption is a major contributor to CO2 emissions. 

Q15. What is the vecm test for the long run relationship between the variables?

The joint 2 statistic for the first differenced lagged independent variables is used to test thedirection of short-run causality between the variables. 

Q16. What tests check the normality of error term, serial correlation, conditional heterosced?

The diagnostics tests check normality of error term, serial correlation, autoregressive conditional heteroscedasticity, white heteroscedasticity and the functional form of empirical model. 

Q17. What is the directional relationship between energy intensity, economic growth, globalization and CO2 emissions?

The directional relationship between energy intensity, economic growth, globalization and CO2 emissions will provide help in articulating comprehensive policy to sustain economic growth by controlling environment from degradation and utilizing energy efficient technologies imported from advanced countries.