Causality among Energy Consumption, CO2 Emission, Economic Growth and Trade

Published date01 August 2015
Date01 August 2015
Subject MatterArticles
Causality among Energy
Consumption, CO2
Emission, Economic
Growth and Trade:
A Case of India
P. Srinivasan1
Inder Siddanth Ravindra2
The present study attempts to examine the causal nexus between energy con-
sumption, CO2 emissions, economic growth and trade in India using the Perron
(1989) unit root test, Gregory and Hansen (1996) cointegration test and vector
error-correction model (VECM). The study results exhibit a long-run relation-
ship between energy consumption, CO2 emissions, economic growth and trade
in India. The empirical results confirm that energy consumption influences the
economic activity in the short run, implying that higher rate of economic growth
is driven by consumption demand for energy in the economy. This is also well
in consistence with the findings of Paul and Bhattacharya (2004) in the Indian
context. Further, the study detects one-way causation that exists from energy
use to CO2 emission and trade, and CO2 emissions to economic growth in the
short run.
JEL: Q43, Q53, Q56
Energy consumption, economic growth, CO2 emissions, trade, cointegration,
Foreign Trade Review
50(3) 168–189
©2015 Indian Institute of
Foreign Trade
SAGE Publications
DOI: 10.1177/0015732515589441
Corresponding author:
P. Srinivasan, Xavier Institute of Management & Entrepreneurship, Electronics City, Phase II, Hosur
Road, Bangalore 560 100, Karnataka, India.
1 Assistant Professor, Xavier Institute of Management & Entrepreneurship, Electronics City, Phase II,
Hosur Road, Bangalore, Karnataka, India.
2 Research Scholar, Department of Economics, Christ University, Bangalore, Karnataka, India.
Srinivasan and Ravindra 169
Energy is the prime mover of economic growth and is vital to sustaining a modern
economy and society. Future economic growth significantly depends on the long-
term availability of energy from sources that are affordable, accessible and secure.
Any uncertainty about its supply can threaten the working of the economy, espe-
cially in the developing economies like India. India is the seventh largest energy
producer and the fifth largest energy consumer in the world. However, energy
supply in India falls short of the growing demand within the country. Over the last
two decades, the Indian economy has grown substantially and the sustained eco-
nomic growth in the country is placing an enormous demand on its energy
resources. But, due to the existence of imbalance between demand and supply for
all the sources of energy, the Government of India faces formidable challenges in
meeting its energy needs and in providing adequate energy of desired quality in
various forms in a sustainable manner and at competitive prices. Besides, the
Indian government has realized the importance of reducing its greenhouse gas
emissions as its contribution to a worldwide attempt to limit global warming. By
2020, India’s mission is to reduce its greenhouse gas emissions per unit of eco-
nomic output by 20–25 per cent when compared to the levels in year 2005, in
keeping with the Copenhagen Accord. In order to be prepared for the challenges
of limiting emissions growth over the coming decades, attention in India’s energy
community is now beginning to focus on how the economy could lower its carbon
intensity over the long term. Indian economy planned to tackle climate change
and reduce energy consumption without compromising economic activity in
India. Our study attempts to empirically investigate the relationship between
energy consumption, environmental degradation or pollution emissions and eco-
nomic growth in India.
Due to the increasing threat of global warming and climate change, several
authors attempt to examine the relationship between energy consumption, envi-
ronmental degradation and economic growth. The main focus of this line of
research has been on the environmental Kuznets curve (EKC) or what is called
as carbon Kuznets curve (CKC) hypothesis. The supposition of the hypothesis
is such that initially as per capita income rises, environmental degradation exag-
gerates, but after achievement of a critical level of economic growth, it tends to
fall down. Therefore, as Rothman and De Bruyn (1998) argue that economic
growth may become a solution rather than a source of the problem. This may be
due to either the increase in the demand for environmental quality as economies
grow (Lantz & Feng, 2006) or the possible energy saving because of the increas-
ing awareness among the people regarding the harmful impact of environmental
The conservation of energy could ensure energy security and lower the emis-
sion of greenhouse gases. The implementation of energy conservation policies
requires careful investigation. Hence, an increased interest has been placed on the
nature of the relationship between energy consumption and economic develop-
ment because understanding the path of causality will aid in shaping environmen-
tal and energy policies. From the supply-side point of view, if energy consumption

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