Dynamic effect of exchange rate depreciation on carbon emission in the Mediterranean basin: fresh insights from linear and non-linear ARDL approaches

Abstract

The key objective of this study is to explore the relationship between economic growth, renewable and non-renewable energy consumption, exchange rate variation, and environmental pollution by carbon dioxide (CO2) emissions in 19 coastline Mediterranean countries over the period 1995-2020. We suggest the application of two different approaches, namely, the symmetric autoregressive-distributed lag (ARDL) and the non-linear ARDL (NARDL) model. These methods distinguished from traditional ones by the fact that they assess both the long and short run dynamics among variables. More importantly, the NARDL method is the only technique enabling us to test the asymmetric effects of a shock in independent variables on dependent ones. Our results indicate that the long-term pollution is positively correlated with exchange rate for developed countries and negatively correlated for developing ones. Since environmental degradation in developing countries is more vulnerable to any fluctuation in exchange rate, we suggest that policymakers in Mediterranean developing countries must pay more attention to exchange rate variation as well as boosting renewable energy consumption in order to decrease CO2 emissions.