Key drivers of consumption-based carbon emissions: empirical evidence from SAARC countries

Abstract

To devise an appropriate climate policy dealing with environmental degradation, reliable measurement of CO₂ emissions is essential. In the recent past, most researchers have utilized production-based emissions in their studies, ignoring the important role of consumption-based emissions in environmental degradation. Therefore, the present research examines the drivers of consumption-based CO₂ emissions in SAARC nations over the period 1990 to 2018. By employing traditional and second-generation panel cointegration methodologies, the study, more specifically, explores the link between consumption-based CO₂ emissions and its five macroeconomic determinants, namely, GDP growth, energy consumption, FDI, trade openness (measured by composite trade share index), and urbanization. The study also applies the FMOLS and DOLS techniques for calculating the long-run elasticities of regressors with respect to the explained variable. The results establish a cointegration relationship between the variables and validate an "N-shaped EKC" for the SAARC region. It is also found that in the long run, energy consumption and urbanization amplify the consumption-based CO₂ emissions while FDI and trade openness improve the environmental quality by plummeting emissions. Most importantly, the study rejects the "pollution-haven hypothesis" for the SAARC region based on the outcomes of FDI and trade openness. Lastly, based on the results, some policies are recommended for the abatement of environmental degradation in SAARC countries. As the SAARC nations rely heavily on fossil-based energy, it is suggestive for these economies to enhance the level of energy efficiency and augment the share of renewable energy sources in the energy mix. Furthermore, the policy designers in this region should encourage trade openness and liberalize inward FDI for containing consumption-based emissions.

Keywords: Composite trade share index; Consumption-based CO2 emissions; Economic growth; FDI; SAARC countries; Trade openness.