Consumption-based carbon emissions in Mexico: An analysis using the dual adjustment approach

Abstract

Abstract The main aim of this paper is to explore the impact of financial development and globalization on consumption-based carbon emissions in Mexico while controlling growth, trade openness, and energy consumption. This impact has not been comprehensively explored for the case of Mexico using the newly developed dual adjustment approach. The fundamental innovation of the approach is that it offers an alternative to cointegration analysis, which reduces the implicit assumption of the singular adjustment in cointegration analysis. Furthermore, the study employs an autoregressive distributed lag approach to capture both the long-run and short-run association, while frequency domain causality tests are applied to capture causal linkages among the variables in the short run, medium run and long run. The empirical findings of this study reveal that: (a) globalization and financial development improve the quality of the environment; (b) energy consumption and economic growth deteriorate environmental quality; (c) trade openness exerts no significant impact on environmental quality. The findings from the frequency domain causality test reveal that financial development, energy usage, and economic growth can predict consumption-based carbon emissions at different frequencies, whereas trade openness and globalization can predict significant variations in consumption-based carbon emissions in the long and short term. Based on the empirical findings, the study suggests that the government of Mexico should be careful when formulating policies aimed at increasing growth, as they could be detrimental to the quality of the environment.