Economic policy uncertainty, energy consumption and carbon emissions in G7 countries: evidence from a panel Granger causality analysis

Abstract

We investigate the causal relationship between economic policy uncertainty (EPU) and energy consumption and carbon (CO2) emissions in G7 countries. We employ a bootstrap panel Granger causality test developed by Kónya (Econ Model 23:978-992, 2006), using a yearly data set spanning from 1998 to 2018. Our test results provide significant support for a unidirectional causality running from EPU to energy consumption in Japan; from EPU to CO2 emissions in the USA and Germany; and from EPU to both energy consumption and CO2 emissions in Canada. In Italy, causality runs from CO2 emissions to EPU, but a bidirectional causality between EPU and energy consumption exists as well. We also explore a unidirectional causality that runs from energy consumption to CO2 in the USA. Based on the overall findings, we draw important implications for policymakers and we strongly recommend for G7 countries to take into account possible negative effects of EPU on energy conservation policies, which should be embarked upon to reduce energy consumption and CO2 emissions, as committed in their recent climate mandate.