Does the need for economic growth influence energy consumption and CO2 emissions in Nigeria? Evidence from the innovation accounting test

Abstract

Developing economies like Nigeria are competing strategically to ensure a rise in sustainable economic growth, and reduction in CO2 emission. The question is, could this be possible amidst the series of energy crises facing the country? It is against this development that this paper investigates empirically if the nexus between economic growth, energy consumption, financial development, trade openness and CO2 emissions in Nigeria could provide a clue. The study used time series data from 1971 to 2011. To ensure a robust result, the study applied the ARDL bounds testing approach to cointegration, the Zivot–Andrew structural break test, and the Bayer–Hanck combine cointegration analysis. The causality analysis, was checked using the VECM model and this was validated using the innovative accounting and the impulse response test. The findings of the study revealed that financial development stimulates energy demand, but lowers CO2 emissions. Economic growth lowers energy demand but increases CO2 emissions. In addition to that, the study discovered how Trade openness increases energy consumption but improves environmental quality by lowering CO2 emissions. Energy consumption was on the other hand, found to have significant increase on CO2 emissions. The Granger causality analysis revealed a bidirectional causal relationship between financial development and energy consumption, and the same inference was found in financial development and CO2 emissions. In this study, trade-led energy hypothesis and the existence of a feedback effect between economic growth and CO2 emissions were discovered. The study recommends massive investment in Nigeria’s financial sector with the motivation for these sectors to invest in efficient, and sustainable renewable energy system. How it should be done and why it should be done are carefully outlined in this study.