Policy uncertainty, economic activity, and carbon emissions: a nonlinear autoregressive distributed lag approach

Abstract

Over the last few years, economic uncertainty has become a global concern. Not only has its impact on economic activities, but there are pieces of evidence that show uncertainty can be the reason for CO₂ emissions. It is also expected that the economic policy uncertainty may decrease or delay economic production, which may lead to a reduction in carbon emissions. Furthermore, uncertainty may decrease friendly environment policies and budgets, which cause an increase in carbon emissions. Thus, there may be an asymmetric relationship between economic uncertainty and the amount of CO₂ emissions. This study investigates the effects of economic policy uncertainty and economic activity on carbon emission applying a nonlinear autoregressive distributed lag (NARDL) cointegration approach in Iran between 1971 and 2018. Findings show that both policy uncertainty and economic growth contribute to CO₂ emissions. The negative and positive shocks of GDP and uncertainty index on CO₂ emissions in both the short run and long run are significant. Based on the results, there is an asymmetric effect of economic production on CO₂ emissions in Iran. The results of analyzing asymmetric effects of economic uncertainty show a symmetric relationship between uncertainty index and CO₂ emissions, in a way that a shock in the uncertainty index lowers carbon emission. To sum up, since uncertainty may affect the analysis of carbon emissions incorrectly, some environmental policies such as allocating a budget for R&D on clean energy and environmental taxes must be implemented.

Keywords: CO2 emissions; Economic growth; Economic policy uncertainty; NARDL approach; Uncertainty Index.