How does economic policy uncertainty impact CO2 emissions? Investigating investment's role across 22 economies (1997–2021)

Abstract

Economic policy uncertainty (EPU) has significant implications for both economic growth and CO2 emissions through investment and consumption. Existing research has produced mixed findings on the impact of EPU on CO2 emissions. Nevertheless, there is a need for further empirical investigation into the role of investment in the relationship between EPU and CO2 emissions in various economies. This article contributes to the literature by examining the investment channel in the EPU-CO2 emissions nexus in 22 economies using annual panel data from 1997 to 2021. The analysis was conducted using eight specifications to classify the empirical estimates of the direct and indirect impacts of EPU on CO2 emissions through the investment channel. The CD test, CADF test, and CIPS test were used to test for cross-sectional dependence, unit root, and cointegration, respectively. The GMM estimation technique was used to test for the long-run relationship. The empirical results suggest that both direct and indirect EPU stimuli on CO2 emissions through the investment channel are positive, and the EKC hypothesis holds. Furthermore, findings show that fossil-fuel energy usage leads to an increase in CO2 emissions. Given the significant impact of economic policy uncertainty on CO2 emissions, policymakers should consider the environmental implications of their policy decisions. Second, reducing fossil fuel energy usage in the production process should be a priority to mitigate the impact of EPU on CO2 emissions.