Energy Consumption, Economic Expansion, and CO2 Emission in the UK: The Role of Economic Policy Uncertainty.

Abstract

On the 23rd of June 2016, the United Kingdom voted to leave the EU, leading to months and years of economic policy uncertainties. Such uncertainties have not only characterized the UK but have become a center point for energy debate in recent times. Given the foregoing, this paper progresses to provide evidence on the role of Economic Policy Uncertainty in the Energy Consumption - Emission nexus in the UK. We use annual data spanning the period of 1985–2017 for the UK for CO2 emissions in tons per capita (CO2), real GDP (RGDP), energy use (EU), and economic policy uncertainty (EPU). The Autoregressive distributed lag model (ARDL) bound test is used to test the fitness of the model in the short and long term. Our model shows that EPU matters most in the short run, as it reduces the growth of CO2 emissions, while prolonged use of EPU in the UK, exhibit controversial influence, where CO2 emissions continue to rise. In addition, pairwise Granger causality shows a one-way causality running from energy use to CO2 emissions, CO2 emissions to economic policy uncertainty, and also from energy use to economic policy uncertainty. However, two-ways causality is found between real GDP and real GDP per capita. Overall, our results imply that EPU is likely to yield a positive effect on climate change for a short time, but continue dependent will, in the long run, create an unhealthy environment. We suggest that the UK government should consider implementing an additional long-run policy that will supplement the effort of EPU.