Energy consumption, economic policy uncertainty and carbon emissions; causality evidence from resource rich economies.

Abstract

The study uses the new World Uncertainty Index to analyze the causality and long-run effects of economic policy uncertainty and energy consumption in a carbon function for countries with high geopolitical risk over the period 1996 - 2017. The Kao test shows a cointegration association between energy consumption, economic growth, geopolitical risk, economic policy uncertainty, and carbon dioxide emissions (CO2). The results based on the Panel Pooled Mean Group-Autoregressive Auto regressive distributed lag model (PMG-ARDL) show that energy consumption and economic growth trigger carbon emissions. Additionally, there is a significant association between economic uncertainties and CO2 emissions in the long-run, while this relationship is negative for geopolitical risks. This implies that higher levels of economic policy uncertainties adversely affect environmental sustainability for countries with higher levels of geopolitical risks. The panel causality analysis by Dumitrescu and Hurlin (2012) identifies a bidirectional relationship between CO2 emissions and energy consumption, economic policy uncertainty and CO2 emissions, economic growth and CO2 emissions, but a unidirectional causality from CO2 emissions to geopolitical risks. Our findings call for the need for vital changes in energy policies to accommodate economic policy uncertainties and geopolitical risks.