Impact of economic policy uncertainty, energy intensity, technological innovation and R&D on CO2 emissions: evidence from a panel of 18 developed economies

Abstract

This study examines the impact of economic policy uncertainty (EPU) and ecological innovation on carbon (CO2) emissions in a panel of 18 developed countries from 2005 to 2018 using second-generation time-series panel data techniques. We use three robust long-run estimators, namely two-stage least squares (2SLS), panel generalised method of moments (GMM) and generalised least squares (GLS), to resolve heterogeneity, endogeneity and simultaneity in the panels. We further performed causality tests to ascertain the direction of causality between the variables. Our estimations suggest three innovative findings. First, economic growth contributes significantly and positively to CO2 emissions; however, this happens at an optimal level of growth after which carbon emission reduces, indicating that our sample exhibits an inverted U-shaped environmental Kuznets curve (EKC) relationship. Second, the impact of EPU on CO2 emissions is diverse: high levels of EPU have a significant influence on CO2 emissions only in high-polluting countries but not in low-polluting ones. Thirdly, research and development (R&D), foreign direct investment (FDI), urbanisation and renewable energy (RE) usage were also found to have varying effects on CO2 emissions. These findings highlight the heterogeneous relationship between carbon emissions and economic indicators even in advanced economies, as the pollution haven hypothesis (PHH) holds true in high-pollution countries while the pollution halo effect holds for low-pollution ones. A key policy implication of this work is that the quest to mitigate emissions should not be a one-size-fits-all approach because not every country’s urbanisation rate, FDI inflows, R&D and renewable energy consumption directly affect CO2 emissions in the face of economic policy uncertainties.