Income and emission: A panel data-based cointegration analysis

Abstract

This paper presents the results of an investigation of the causality issue of income–emission relationship based on time series econometric techniques of unit root test, cointegration and related error correction model applied to a panel data set. Here, the nature of causality between per capita CO 2 emission (PCCO2) and per capita GDP (PCGDP) has been examined using a cross country panel data set of yearly observations covering 88 countries and the time period 1960–1990. Using the panel unit root test procedure of Im et al. (2003) [Im, K.S., Pesaran, M.H., Shin, Y., 2003. Testing for unit roots in heterogeneous panels, Journal of Econometrics 115, 53–74] (IPS), it has been found that the null hypothesis of presence of a unit root (i.e., non-stationarity) of the time series of PCGDP and PCCO2 cannot be rejected for most of the country-groups. The panel data cointegration tests have been performed next. Finally, the ECM has been estimated to explore the nature of the short run dynamics of the PCGDP–PCCO2 relationship for those country-groups for which PCGDP and PCCO2 are observed to be cointegrated. The results obtained suggest that there is more or less a bi-directional causal relationship between PCGDP and PCCO2 for Africa, Central America, America as a whole, Eastern Europe, Western Europe, Europe as a whole and the World as a whole. That means, the movement of the one variable directly affects the other variable through a feedback system. This result should be of concern to policy makers as this has obvious implication for possible feedback effect of a policy of emission control.