Testing the impact of real interest rate, income, and energy consumption on Turkey's CO2 emissions.

Abstract

This paper aims to explore the impact of real interest rates (RIN), income, trade, foreign direct investment (FDI), and energy consumption on Turkey's carbon dioxide emissions (CO2) over the period from 1980 to 2014. This study differs from the existing literature by introducing a new discussion in the determination of environmental degradation, namely real interest rate. Hatemi-J (HJ) cointegration with two structural breaks and the newly developed Bayer-Hanck (BH) combined cointegration tests are used to enhance and support the robustness of the autoregressive distributed lag (ARDL) bounds test. The Granger causality test within the vector error correction model (VECM) is employed to examine the causality direction among the variables in both the short and long run. The empirical results demonstrate that RIN negatively effects CO2 emissions. This impact is also supported through energy, income, and FDI channels. It is suggested that policy makers should promote the stability of the real interest rates channel to reduce CO2 emissions and encourage the renewable energy investment through the production of electricity using renewable sources.