Investigating CO2 Emissions Drivers: Energy Use, Economic Growth, Urbanization, and Trade Openness

Abstract

This article investigates the impact of energy consumption, economic growth, urbanization, and trade openness on carbon dioxide emissions for a global panel comprising 58 countries. Utilizing dynamic simultaneous-equation panel data models, we analyze three regional panels: European and North Asian countries, Latin America and the Caribbean, and the Middle East, North Africa, and sub-Saharan regions. The dataset spans from 1990 to 2021, providing a comprehensive temporal scope for analysis. Our results reveal that energy consumption has a statistically significant positive effect on CO2 emissions across all four panels. This finding underscores the direct correlation between higher energy usage and increased carbon emissions, highlighting the environmental cost of energy consumption. Similarly, GDP per capita exhibits a positive and statistically significant effect on CO2 emissions for the global panel, as well as specifically for European and North Asian countries, and the Middle East, North Africa, and sub-Saharan regions. This indicates that economic growth, as measured by GDP per capita, contributes to higher CO2 emissions, reflecting the environmental implications of economic expansion. Interestingly, our empirical results also suggest the presence of an inverted U-shaped curve, known as the Environmental Kuznets Curve (EKC), between CO2 emissions and GDP per capita. This implies that initially, economic growth leads to increased emissions; however, after reaching a certain income level, further economic growth results in reduced emissions. This pattern suggests that economic development eventually facilitates investments in cleaner technologies and more stringent environmental regulations. Urbanization, on the other hand, is found to have a negative and statistically significant impact on CO2 emissions for the global panel. This result indicates that increased urbanization may lead to more efficient energy use and lower per capita emissions, possibly due to better infrastructure and public transportation systems prevalent in urban areas. Trade openness presents a nuanced picture. For the European and North Asian countries, as well as the Middle East, North Africa, and sub-Saharan regions, trade openness has a negative and statistically significant effect on CO2 emissions. This suggests that greater integration into the global economy may encourage the adoption of cleaner technologies and more stringent environmental standards, thereby reducing emissions. Conversely, the impact of trade openness on CO2 emissions in Latin America and the Caribbean was not statistically significant in our analysis. Overall, this study provides valuable insights into the complex interactions between energy consumption, economic growth, urbanization, trade openness, and CO2 emissions. The findings suggest that while economic growth and energy consumption are major drivers of CO2 emissions, urbanization and trade openness can potentially mitigate these effects. Policymakers can leverage these insights to design strategies that balance economic development with environmental sustainability. Emphasizing energy efficiency, supporting urban infrastructure development, and fostering international trade relations that prioritize environmental standards are crucial steps toward reducing global carbon emissions.