Malaysia’s Energy-Growth Nexus and Environmental Kuznets Curve Hypothesis: Empirical Analysis Using the VECM and ARDL Cointegration Techniques

Takashi Fukuda

doi:10.52941/jad.v8i1.22

Abstract

This paper investigated Malaysia’s energy-growth nexus and environmental Kuznets curve (EKC) hypothesis over the period 1971-2014 by taking the globalization variables of trade openness and foreign direct investment (FDI) and the structural break dummy of the Asian financial crisis of 1997 into estimation. To give interference, the Granger causality tests were implemented in the framework of two cointegration techniques: vector error correction model (VECM) and autoregressive distributed lag (ARDL). As per Malaysia’s energy-growth nexus, referring to different results of the two approaches, we concluded that the presence of the energy-growth nexus was statistically confirmed, but it has not been fully established yet in the country. On the other hand, both the VECM and ARDL results provided the same conclusion for Malaysia’s EKC hypothesis, that is, in the initial stage, as the higher economic growth, the less CO2 emissions, but after a threshold, the higher economic growth, the more CO2 emissions.

Highlights

Energy is very important for economic development which has been typically enabled by fossil fuel-based energy consumption
Foreign direct investment is I(1) in the augmented Dickey-Fuller (ADF) test, but it is I(0) in the Phillips and Perron (PP) test. Looking at these statistics as a whole, we argue that all the variables are not perfectly okay but is fairly acceptable for the vector error correction model (VECM) and autoregressive distributed lag (ARDL) cointegration analysis
We investigated Malaysia’s energy-growth nexus and environmental Kuznets curve (EKC) hypothesis over the period 1971-2014 by taking the globalization variables of trade openness and foreign direct investment (FDI) and the structural break dummy of the Asian financial crisis of 1997 into estimation

Summary

Introduction

Energy is very important for economic development which has been typically enabled by fossil fuel-based energy consumption. In order to fulfil the growing demand for energy, emerging countries need more production, which leads to more energy consumption. As inferred from the fact that the United Nation's sustainable development goals (SDGs) and the Paris Agreement have been the hottest topics, the relationship between environmental sustainability and economic growth is an important issue in terms of policy and academia. In this regards, the environmental Kuznets curve (EKC) hypothesis, which postulates an inverted-U-shaped relationship between environmental pollutants and economic growth, has been hotly discussed in the literature (see Grossman and Krueger, 1991)

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Conclusion