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 four macroeconomic determinates, namely, GDP growth, energy consumption, FDI, and trade openness (measured by Composite Trade Share Index). The study also applies the FMLOS 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 the “EKC hypothesis” for the SAARC region. It is also found that in the long run, as expected, energy consumption enhances 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 negative and statistically significant coefficient of FDI. 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.