The Effects of Economic, Financial and Political Developments on Iran’s CO2 Emissions

Abstract

This study examines dynamic interrelationships and causality relationships among CO2 emissions, economic, political and financial variables over the period of 1971-2011 for the case of Iran as one of the top CO2 emitting countries in the world. The results of ARDL and Johansen cointegration approaches confirm the existence of long run relationship among CO2 emissions, energy consumption, GDP, financial development, trade openness and political development. The results of variance decomposition analysis show that energy consumption, GDP and democracy can explain the big parts of the CO2 variations in the first year after initial shock but after ten years the roles of financial development, trade openness and energy consumption are more important. The estimation of long run and short run equations using ARDL approach indicates that the effects of GDP and energy on CO2 emissions are positive in both long run and short run. The effects of democracy although are minor but they are negative in short run and positive in long run. Our results confirm the existence of an inverted U-shaped relationship between trade openness and CO2 emissions and also a U-shaped relationship between CO2 emissions and financial development both in long run and short run.