CO2 emissions, real output, energy consumption, trade, urbanization and financial development: testing the EKC hypothesis for the USA

Dogan, Eyup; Turkekul, Berna

CO2 emissions, real output, energy consumption, trade, urbanization and financial development: testing the EKC hypothesis for the USA

2016

Dogan, Eyup | Turkekul, Berna

This study aims to investigate the relationship between carbon dioxide (CO₂) emissions, energy consumption, real output (GDP), the square of real output (GDP²), trade openness, urbanization, and financial development in the USA for the period 1960–2010. The bounds testing for cointegration indicates that the analyzed variables are cointegrated. In the long run, energy consumption and urbanization increase environmental degradation while financial development has no effect on it, and trade leads to environmental improvements. In addition, this study does not support the validity of the environmental Kuznets curve (EKC) hypothesis for the USA because real output leads to environmental improvements while GDP² increases the levels of gas emissions. The results from the Granger causality test show that there is bidirectional causality between CO₂ and GDP, CO₂ and energy consumption, CO₂ and urbanization, GDP and urbanization, and GDP and trade openness while no causality is determined between CO₂ and trade openness, and gas emissions and financial development. In addition, we have enough evidence to support one-way causality running from GDP to energy consumption, from financial development to output, and from urbanization to financial development. In light of the long-run estimates and the Granger causality analysis, the US government should take into account the importance of trade openness, urbanization, and financial development in controlling for the levels of GDP and pollution. Moreover, it should be noted that the development of efficient energy policies likely contributes to lower CO₂ emissions without harming real output.

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