Carbon Dioxide Emissions and Economic Growth: A Bivariate Co-integration Analysis for Two Emerging Markets of India and China

Abstract

The article investigates the co-integrating relation between carbon dioxide (CO2) emissions and economic growth of India and China: the two emerging markets of Asia. The article also tries to test the functional form of EKC as applicable to India and China. The study takes annual data for the 55 year period from 1960–2014 and the variables included are GDP per capita (a proxy for economic growth) and CO2 emissions per capita (a proxy for the environmental degradation). The co-integrating relation has been tested using Johansen (1988) co-integration test which is supplemented with VAR-VECM Model at p-1 lags with error correction mechanism showing adjustment between short- and long-run equilibrium. The diagnostics include stationarity, parameter stability and structural breaks (using Chow breakeven test & CUSUM plots) and serial correlation (using VEC-LM test). The empirical results showed long-term co-integration between GDP and CO2 emissions for India but not for China with lagged ECM term for India with a value of 0.0466 showed that the 4 per cent of the dis-equilibrium be corrected in same year itself. The stationary test showed that both our variables were stationary either at I(1) or I(2) but none of these were at levels. The null of serial correlation showed no serial correlation. The Chow and Stability tests revealed that for CO2 emissions in India, there was a break in 2009. VEC Granger causality tests showed that there was uni-directional causality for India flowing from GDP to CO2 emissions. EKC functional form of Cubic representation was proved for China where the curve was found to be ‘N’ shaped but EKC could not be proved in case of India.