An econometric study of CO2 emissions, energy consumption, income and foreign trade in Iran

Ghanbari, A. IIES[1], Iran, 00982122029350,

Mohammadbagheri, A. IIES, Iran, 00982122029351,

Overview

Understanding the impact of economic growth on the environmental quality is becoming increasingly important as general environmental concerns are making their way into main public policy agenda. The relationship between environmental quality and economic growth is empirically modelling through pollutants-income relationship, and is formulating by the so called environmental Kuznets curve (EKC). Kuznets Curve hypothesis is a tool for describing the relationship between the measured levels of environmental quality indicators such as CO2, SO2, ect. and income per capita. This hypothesis, proposes that there is a nonlinear quadratic relationship between income and environmental pollutants or the usage of natural resources such as forest resources. In empirical studies demonstrate the EKC between income and environmental pollutants such as sulfur dioxide (SO2), nitrogen oxide (NOx), dioxide carbon (CO2), and suspended particulate matter. Since CO2 is to be the main source of global warming issues, the EKC for carbon dioxide (CO2) emissions is attracted great attention in recent years.

In the empirical studies of EKC for CO2 emissions other than income other variables that can also exist as determinant of emissions must be added. Because that may cause the omitted variable bias, if income is used as the only independent variable. Generally empirical studies are paying attention to the effects foreign trade and energy consumption in addition to income. As it known economic development is closely related to energy consumption, and more energy consumption (that is further hydrocarbon resources) leads to higher CO2 emission. Also according some of trade theory and empirical studies, emissions is related to trade and openness ratio (for example Wyckoff and Roop estimated that 13% of the total carbon emissions of the six largest OECD countries are embodied in their imports of manufactured goods).

Methods

This paper examines the long-run relationship between CO2 emissions and energy consumption, income and foreign trade in the case of Iran for period 1970-2007. We argue that used variables are inter-related and therefore their relationship must be examined using an integrated framework. Additionally, we examine the stability of the estimated models through the diagnostic and stability tests. Auto regressive distributed lag (ARDL) methodology is employed for model estimation and empirical analysis.

Results

The empirical results suggest the existence of a fairly robust long-run relationship between the variables. The sign of all variable is consistent with what have been expected. The results indicate that more energy consumption results in more CO2 emissions, and CO2 emissions and income do not have a quadratic relationship in long and shore run. Foreign trade has a positive but statistically insignificant that indicate doesn't impact on CO2 emissions.

Conclusions

Conclusion is that energy consumption is the most significant variable in explaining the CO2 emissions in Iran, which is followed by energy consumption. Also energy consumption has the most effect on CO2 emissions. Moreover is concluded EKC relationship can not be supported in Iran for period 1972-2007. According the empirical results, Iran should design new environmental policies to reduce environmental degradation.

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[1] - Institute of International Energy Studies