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The effects of tourism on economic growth and CO
2
emissions: A comparison between
developed and developing economies
Abstract
The objective of this study is to empirically examine the effect of tourism on economic growth
and CO
2
emissions across the panels of developed and developing economies around the world.
The study also investigates the Environmental Kuznets Curve (EKC) hypothesis between
tourism revenue and CO
2
emissions. To achieve these objectives, study employs robust panel
econometric techniques on balanced panel data sets of developed and developing economies.
The cointegration test results confirm the long-run equilibrium relationship among the
variables. Similarly, the long-run elasticities indicate that tourism has a significant positive
impact on economic growth and CO
2
emissions of both developed and developing economies.
The results also imply the presence of EKC hypothesis between tourism and CO
2
emissions.
More specifically, our results indicate that after a threshold point the contribution of tourism to
the CO
2
emissions is negligible, and the reduction is much greater in developed economies than
those of developing economies. Overall, our findings reveal that tourism plays a significant
role in stimulating economic development and prosperity; though it increases CO
2
emissions.
However, the effect of tourism on the CO
2
emissions can be minimized by adopting more
sustainable tourism policies and efficient management across developed and developing
economies.
Keywords: Tourism, CO
2
emissions, economic growth, developed and developing economies
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1. Introduction
Tourism has experienced significant growth over the last few decades and become one of the
largest industries both in the developed and developing economies.
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Despite various domestic
and international wars, political turbulence, terrorist activities, natural calamities, disease
epidemics, energy crises and economic distress in numerous parts of the world, international
tourist arrivals worldwide reached a record high from only 166 million in 1970 to 1.33 billion
in 2014 (UNWTO, 2015). Moreover, globally, international tourism generated US$1.5 trillion
revenue earnings, 277 million employment, and 10% of the worlds gross domestic product
(GDP) in 2014 (WTTC, 2015). Along with these direct impacts, tourism also has tremendous
indirect positive effects on the national and global economy through its contribution to the
balance of payments, improving the living standards of citizens, accumulating foreign
exchange reserves, raising production of goods and services, and increasing government
revenues in the form of profits and taxes. In addition, the sector also leads convergence from
developed countries to developing ones by transferring income. Therefore, expansion of the
tourism industry is considered as an engine of economic development across the world (Brida
＆ Risso, 2009; Tang ＆ Tan, 2013).
While tourism yields immense positive economic influences, it may have an adverse effect on
the environment in the form of CO
2
emissions at both national and international levels since
most of the tourism activities need energy consumption directly from fossil fuels or indirectly
from electricity that often generated from coal, natural gas or oil. For example, according to
the United Nations World Tourism Organization (UNWTO, 2007), tourism is responsible for 5
percent of global CO
2
emissions, particularly from transportation, accommodation, and other
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According to the International Statistical Institute (ISI, 2015), economies which have a Gross National Income
(GNI) per capita of US$ 11,906(specified by the World Bank, 2013) and more are considered as developed
economies. On other hand, economies with a GNI per capita of US$ 11,905 and less are defined as developing
economies.
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tourism-associated activities.
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Hence, the development of the tourism industry can lead to
severe adverse influences on the environment. However, United Nations Environment
Programme (UNEP) argues that well-managed tourism can play a positive role on the
environment through promoting the usage of environment-friendly technology and
transportation, and contribute to the environmental protection and conservation (UNEP, 2008).
Hence, it can be a way to raise the consciousness of environmental safeguards and work as a
tool to finance against environmental degradation.
While past studies have investigated the impact of tourism on CO
2
emissions and environment
(Becken ＆ Simmons, 2002; Gössling, 2002), most of the research is conducted on the basis of
qualitative judgment because the environmental impacts of tourism activities are not easy to
measure. Even though some studies (e.g. Becken ＆ Patterson, 2006; Kuo ＆ Chen, 2009)
attempt to quantify the environmental impact, they are limited to a particular country and a
year by using survey data. Therefore, empirical studies based on numerous countries and long-
time series data to provide more general and reliable findings are scarce in the prevailing
literature due to the lack of reliable panel data. To fill the research gap, this research attempts
to examine the effects of tourism on CO
2
emissions and economic growth using a panel
framework.
This study contributes to the literature in four ways. First, this study pioneers to examine the
dynamic relationship between tourism and CO
2
emissions in a panel framework to reflect the
importance of causality between tourism and CO
2
emissions. Second, the sample countries in
this study cover major tourism receipts countries not only accounting for 84 percent of total
world’s tourism income but also being responsible for 85 percent of global CO
2
emissions in
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Jones and Munday (2007) also clearly demonstrated the selected environmental consequences of tourism
activities.
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2013. Hence, this study provides a robust insight into the relationships among tourism,
economic growth and CO
2
emissions. Third, different from previous studies such as Lee and
Brahmasrene (2013) and León et al. (2014), this study conducts a comparative analysis between
developed and developing economies by using a longer time period data to enhance our
understandings of explicit differences in the impacts of tourism on economic growth and CO
2
emissions. Finally, our study advances previous works in tourism literature by adopting
recently developed econometric techniques. For instance, the Pesaran (2004) cross-sectional
dependence (CD) test is used to identify the cross-sectional dependence among the variables.
The Fisher-type Johansen panel cointegration test by Maddala and Wu (1999) is used to
investigate the long-run equilibrium relationship. The fully modified OLS (FMOLS) model
and the heterogeneous non-causality test (Dumitrescu & Hurlin, 2012) are employed to
estimate long-run elasticities and causal relationship among the variables, respectively.
The remainder of this paper is organized as follows. Section 2 provides a review of existing
literature. Section 3 describes the empirical methodology, nature of data and measurement.
Section 4 presents empirical results and discussion. Finally, Section 5 provides conclusions and
future research direction.
2. Literature review
Tourism development inevitably derives various impacts such as economic, environmental and
socio-cultural economies on the tourism destination. To sustain the development of tourism, it
is crucial to understand these impacts and their inter-relationships. In particular, while tourism
growth has a positive impact of economic growth (e.g. income increase, employment etc.) or
vice verse, it also likely brings negative environmental impacts during the process of tourism-
related service provision. However, it attracts research attention to take a deeper look at
whether the negative environment impact associated with tourism development still holds
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given the adoption of environmental-friendly strategies and technologies. Past studies by and
large investigate the causal relationships either between tourism development and economic
growth or between tourism development and environmental impact such as CO
2
emissions. In
this section, we review the literature using time-series techniques of econometric model by two
subsections: i) tourism and economic growth and ii) tourism and CO
2
emissions.
2.1 Tourism and Economic Growth
Tourism economy theory argues that tourism-led growth may take place when tourism exhibits
a stimulating impact on economy through spillovers and other externalities (Marin, 1992;
Balaguer & Cantavella-Jorda, 2002). There have also been a number of studies that empirically
investigates the causal relationship between tourism and economic growth. Based upon the
empirical evidences, four different strands of literature regarding the casual reltionship between
tourism and economic growth can be found: i) tourism-led economic growth, ii) economic-
driven tourism growth, iii) feedback relationship between tourism and economic growth, and
iv) no causal relationship
Tourism-led economic growth suggests that a unidirectional causality runs from tourism
development to economic growth, i.e. a positive long-run association between the expansion
of tourism activities and economic growth. Past empirical studies widely support the
perspective of tourism-led economic growth, such as Archer (1984) for Barbados, Durbarry
(2002) for Mauritius, Gunduz and Hatemi-J (2005) for Turkey, Lee and Chang (2008) for 55
OECD and non-OECD countries, Narayan et al. (2010) for 4 Pacific Island countries, Castro-
Nuño et al. (2013) for 87 countries and Cárdenas García et al. (2015) for 144 countries.
Furthermore, some studies argue that positive externalities derived from tourism development
also enhance economy indirectly. For example, Archer (1995) suggests that the growth of
tourism industry has multiplier effects such as employment generations, gross savings and