Relationship between economic diversification and CO2 emissions: ARDL-EC modeling in South Africa

ABSTRACT Economic diversification transforms an economy to utilize multiple sectors for growth. The problem is that developing countries have been slow in shifting away from mineral-energy complex-based development. However, sector-heterogeneity either reduces or increases exposure and/or adaptive capabilities to greenhouse gas emissions. The objective of the study was to ascertain the relationship between economic diversification and carbon dioxide (CO2) emissions in South Africa. The study utilized the autoregressive distributed lag-error correction model (ARDL-ECM) and included macroeconomic variables such as gross domestic product (GDP), population, foreign direct investment and trade balance. The Tress Index of 10 industries was utilized to measure economic diversification. Annual data from 1993 to 2020 were used in the study. The study found that in the short run, CO2 Granger caused economic diversity but in the long run, there was no association. Population also had a long- and short-run relationship with economic diversification, while CO2 emissions had a long- and short-run relationship with GDP. The study concludes that there is a unidirectional causality between economic diversification and CO2 emissions in the short run and no relationship in the long run. Economic diversification should be considered in national, economic and climate change policies of the country.