Comparing the relationship among CO2 emissions, energy consumption and economic growth in high and low income countries: Panel Granger causality and cointegration testing

Abstract

Energy is an important element used in the production industry, and it is crucial for the development of a country. However, higher consumption of energy could lead to higher carbon dioxide emissions. Previous studies had shown that these variables are highly correlated. However, results may vary across economies. In this study, we seek to study the relationships between these three variables by comparing countries in different groups, i.e. high-income countries versus low-income countries. The study’s main objectives include (1) to examine the short-run relationship (one-way or two-way) on pairs of variables using panel Granger causality test; (2) to reveal the long-run cointegration relationship based on three different models using panel unit root and cointegration tests. These tests are based on statistical hypotheses testing. Our panel data consists of 30 countries throughout the time period of 1971-2013. The result of the panel unit root tests show that each variable is integrated of order one, I(1) for both groups of countries, while the Granger causality test reveals some evidence on the short-run relationships between the variables in both groups of countries. Moreover, the panel cointegration tests detect a long-run relationship, which is stronger in low-income countries. This study provides a deeper understanding of the interactions of these three variables and suggest the implementation of appropriate actions and policy to achieve a balance between environmental quality and growth in the sustainable development of a country.