Consumption-based carbon emissions and International trade in G7 countries: The role of Environmental innovation and Renewable energy

Abstract

The role of a reliable carbon emissions measurement is important for devising a relevant climate policy to deals with environmental problems. Based on trade adjusted statistics of carbon emissions, a relevant climate policy response can be provided, especially following the conference of Paris (COP, 21). To explore the unidentified determinants of CO2 emissions in G7 countries from 1990 to 2017, this study uses second-generation panel co-integration methodologies. Results of P&Y's slope heterogeneity test and Pesaran's CD test confirm the existence of correlation among cross-sectional units and slope heterogeneity across countries. The results confirm a stable long-run relationship among CO2 emissions, trade, income, environmental innovation and renewable energy consumption. In the long run, imports and income enhance consumption-based carbon emissions, while exports, environmental innovation and renewable energy consumption are helpful in abating consumption-based CO2 emissions. The results are also reconfirmed by Augmented Mean Group (AMG) and Common Correlated Effect Mean Group (CCEMG) methods. Based on the results of the Dumitrescu and Hurlin (2012) Granger causality test, it is argued that any policy to target exports, imports, income and environmental innovation significantly changes CO2 emissions. On the contrary, any policy to support environmental degradation does not affect these variables. Moreover, any policy to target renewable energy sources significantly affects consumption-based CO2 emissions and vice versa. This might lead the policymakers to adopt strategies that are eco-friendly such as the deployment of renewable energy and environmental innovation to attain sustainable environment.