Analyzing the Nexus between Energy Consumption, CO2 Emissions, and Economic Growth in Nigeria

Abstract

This study conducts a comprehensive analysis of the causal relationship between energy consumption, CO2 emissions, and economic growth in Nigeria over the period 1980-2020, considering the presence of structural breaks. Employing two sets of unit root tests—one accounting for structural breaks and the other not—the study provides valuable insights into the dynamics among these variables. The results of the Johansen test indicate cointegration between economic growth and various energy consumption metrics, including energy, electricity, and gas consumption, as well as CO2 emissions from power generation. However, the Gregory and Hansen test only identifies cointegration between economic growth and CO2 intensity, suggesting a more nuanced relationship between economic growth and environmental factors. Furthermore, the Granger causality analysis reveals bidirectional causality between GDP and energy consumption in the short run, with a unidirectional flow from GDP to energy consumption in the long run. Similarly, GDP and gas consumption exhibit bidirectional causality both in the short and long run, indicating a mutually reinforcing relationship between economic activity and gas consumption. In contrast, the relationship between electricity consumption and GDP shows mixed unidirectional causality in both the short and long run, highlighting the complexity of their interaction. Notably, the causality analysis indicates a unidirectional flow from GDP to CO2 emissions from power generation and intensity, underscoring the influence of economic growth on environmental outcomes. Based on these findings, the study offers several policy recommendations for Nigeria. Firstly, energy conservation policies should be implemented cautiously, considering their potential impact on economic growth. While conserving energy is important for environmental sustainability, overly restrictive policies may inadvertently hinder economic development. Secondly, the study suggests that gas development should be encouraged as part of Nigeria's energy strategy. Gas is a cleaner alternative to traditional fossil fuels and can contribute to reducing CO2 emissions without sacrificing economic growth. Additionally, diversifying Nigeria's energy mix can help mitigate CO2 emissions while supporting economic growth. Investing in renewable energy sources such as solar and wind power can further enhance energy security and sustainability.