Energy consumption, carbon dioxide emissions and economic growth: The case of Saudi Arabia

Abstract

Abstract This paper investigates the dynamic causal relationships between energy consumption, energy price and economic activity in Saudi Arabia based on a demand side approach. We use a Johansen multivariate cointegration approach and incorporate CO 2 emissions as a control variable. The results indicate that there exists at least a long-run relationship between energy consumption, energy price, carbon dioxide emissions, and economic growth. Furthermore, a long-run unidirectional causality stands from energy consumption to economic growth and CO 2 emissions, bidirectional causality between carbon dioxide emissions and economic growth, and a long-run unidirectional causality runs from energy price to economic growth and CO 2 emissions. In the short-run, there is unidirectional causality running from CO 2 emissions to energy consumption and economic output and from energy price to CO 2 emissions. Even though, the energy-led growth hypothesis is valid, the share of energy consumption in explaining economic growth is minimal. Energy price is the most important factor in explaining economic growth. Hence, policies aimed at reducing energy consumption and controlling for CO 2 emissions may not reduce significantly Saudi׳s economic growth. Investing in the use of renewable energy sources like solar and wind power is an urgent necessity to control for fossil fuel consumption and CO 2 emissions.