Economic growth, energy consumption, financial development, international trade and CO2 emissions in Indonesia

Abstract

This study examines the linkages among economic growth, energy consumption, financial development, trade openness and CO2 emissions over the period of 1975Q1–2011Q4 in case of Indonesia. The stationary analysis is performed by using Zivot–Andrews unit root test and the ARDL bounds testing approach for a long run relationship between the series in the presence of structural breaks. The causality between the concerned variables is examined by the VECM Granger causality technique and robustness of causal analysis is tested by innovative accounting approach (IAA).Our results confirm that the variables are cointegrated; it means that the long run relationship exists in the presence of structural breaks. The empirical findings indicate that economic growth and energy consumption increase CO2 emissions, while financial development and trade openness compact it. The VECM causality analysis has shown the feedback hypothesis between energy consumption and CO2 emissions. Economic growth and CO2 emissions are also interrelated i.e. bidirectional causality. Financial development Granger causes CO2 emissions. The study opens up new policy insights to control the environment from degradation by using energy efficient technologies. Financial development and trade openness can also play their role in improving the environmental quality.