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Modeling Energy Consumption, CO2 Emissions and Economic Growth Nexus in Ethiopia: Evidence from ARDL Approach to Cointegration and Causality Analysis

Kebede, Shemelis (2017): Modeling Energy Consumption, CO2 Emissions and Economic Growth Nexus in Ethiopia: Evidence from ARDL Approach to Cointegration and Causality Analysis.

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Abstract

Energy consumption is one of the important inputs to the production process. Energy consumption and energy supplied from fossil fuels in production process cause CO2 emissions and environmental deterioration. Due to this fact achieving economic development and environmental sustainability simultaneously is one of the most significant development challenges for Africa today. Formulation of sound economic development and environmental sustainability policy needs knowing the relationship among energy use, economic growth and environmental quality. This study examines the relationship among economic growth, energy consumption, financial development, trade openness, urbanization, population and CO2 emissions over the period of 1970–2014 in case of Ethiopia. The PP, ADF, KPSS, Zivot-Andrews and Clemente, Montanes and Reyes unit root tests were used to test the stationarity of the variables under consideration. The ARDL cointegration technique for establishing the existence of a long-run relationship and Toda-Yamamoto approach to determine the direction of causality between the variables were used. The results show that cointegration exists among the variables. Energy consumption, population, trade openness and economic growth have statistically significant positive impact on CO2 in the long-run while economic growth squared compacts CO2 emissions. This supports validity of the EKC hypothesis in Ethiopia. In the short-run urbanization and energy consumption intensify environmental degradation. Toda-Yamamoto granger causality results indicate the feedback relationship between energy consumption, CO2 emissions and urbanization. Financial development, population and urbanization cause economic growth while economic growth causes CO2 emissions. Causality runs from energy consumption to financial development, urbanization and population which in turn cause economic growth. Form the result, CO2 emissions extenuation policy in Ethiopia should focus on environmentally friendly growth, enhancing consumption of clean energy, incorporating the impact of population growth, urbanization, trade and financial development.

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