Does domestic investment matter? A multivariate time series analysis of the energy-CO2 emission-growth nexus in Ghana.

Abstract

The economic cost of greenhouse gas (GHG) emissions to African economies have increased. Therefore, GHG emissions and their concomitant effect on the environment are fast becoming costly for emerging economies like Ghana. Hence, the justification for the growing literature on the subject. This study employed the Autoregressive Distributive Lag (ARDL) bounds test and Granger causality techniques with data from 1983 to 2014. The study examines the dynamic relationship between income growth, power consumption, and carbon dioxide (CO2) emissions in Ghana, capturing the role of domestic investment and foreign direct investment (FDI) in the nexus. All variables were found to be cointegrated in the long run based on the bounds test. The Granger causality test indicates a unidirectional causality from energy consumption to CO2 emissions and economic growth. Furthermore, a unidirectional causality from CO2 to economic growth was found in Ghana. Results from the error correction model and the bounds tests indicate that, while energy consumption increases carbon emissions by more than 44%, the lagged values of domestic investment were found to reduce CO2 emissions by more than 41% in both the short run and the long run. Due to the significant effect of domestic investments on the reduction of CO2 emissions, the study recommends policymakers toadopt policies that may increase domestic capital in place of FDI, which has been proven to exacerbate environmental degradation in host countries.