Decoupling CO2 Emissions in Nordic countries: Panel Data Analysis

Abstract

The paper summarizes the principal notions of Kuznets hypothesis and Environmental Kuznets Curve as well as their implications in Nordic countries as examined by eminent scholars.The survey of huge literatures on this issue indicated that the absolute and relative decoupling of CO2 emissions were quite relevant for those countries who have been playing leading role in combating emissions to fulfill Paris Agreement. The main purpose of the research is to test empirically the decoupling CO2 emissions per capita from the GDP per capita in the Nordic countries from the World Bank data during 1970-2016 through panel data analysis which can detect the feasibility of environmental Kuznets curve hypothesis. This verification might be relevant to achieve higher GDP per capita that could force CO2 emission per capita to decline after a threshold point. The paper applied simple semi-log linear trend model to compute growth rate of GDP per capita and CO2 emission per capita. Fixed effect panel regression model was used after verifying Hausman test (1978) to find out decoupling theory. Bai-Perron model (2003) was applied for structural breaks of CO2 emission per capita. Fisher (1932) and Johansen model (1988, 1991) were used to find panel cointegration and vector error correction. The Wald test (1943) was done to confirm short run causality of the variables. The Cointegrating equations were justified to sort out long run causalities. Unit circle and impulse response functions showed stability and non-stationary of the model. The empirical findings of the time series data from 1970-2016 proved that Denmark and Norway satisfied the decoupling hypothesis significantly but Finland, Greenland, Iceland, Sweden showed insignificant decoupling. Denmark, Iceland and Sweden have downward structural breaks of CO2 emissions per capita and Norway showed upward structural breaks. On the other hand fixed effect panel regression analysis verified that there is no decoupling from per capita GDP , but there is absolute decoupling from square of the per capita GDP and there is relative decoupling from cube of the per capita GDP of the Nordic Countries from 1970 to 2016.Cointegration test suggest that both CO2 emission per capita and GDP per capita are cointegrated and VECM and the Wald test confirmed that there is short run and long run causalities from GDP per capita to CO2 emission per capita.The empirical research verified that environment Kuznets curve hypothesis is feasible in the Nordic countries during 1970-2016 and its shape is inverse U shaped. The results of the research can be useful to formulate policies on targeting GDP growth rate to reduce CO2 emissions within a specified period in the Nordic region.

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