Interaction between CO2 emissions, energy consumption and economic growth in the Middle East: panel causality evidence

Abstract

The Middle East is one of the biggest suppliers of energy resources in the world. Through electricity production, transportation, oil and gas industries, industrial heating, the quality of air, environment and the whole economy at large is being affected. It is on this premise, this study examine the long-run equilibrium relationship and Granger causality interaction between CO2 emissions, income per capita and energy use caused by these traffics. We employ second generation panel approach that account for cross-sectional dependency, panel bootstrap cointegration testing as introduced by Westerlund and Edgerton (2007) and Granger causality testing procedure as proposed by Dumitrescu and Hurlin (2012). These econometrics techniques are robust for panel cointegration and panel Granger causality analysis. From our empirical results, we found evidence in support of a long-run equilibrium relationship among the variables, a bidirectional causality running from CO2 to energy use, and unidirectional causality running from CO2 emissions to income per capita. However, between income per capita and CO2 emissions, income per capita to energy use and energy use to income per capita all without a feedback in the long-run. We propose significant policy implications based on our empirical results.