International Economics (xxxx) xxxxxxxx

Contents lists available at ScienceDirect

International Economics
journal homepage: www.elsevier.com/locate/inteco

CO2 emissions, renewable and non-renewable energy

consumption, and economic growth: Evidence from panel data for
developing countries
Katsuya Ito
Fukuoka University, 1892-1 Bojo Kamimine-cho Miyaki-gun Saga-ken, 849-0123, Japan

A R T I C L E I N F O ABSTRACT

JEL classication: In this paper, using panel data of 42 developed countries over the period 20022011 we attempt
Q01 to empirically examine the linkage between CO2 emissions, renewable and non-renewable
Keywords: energy consumption, and economic growth. Our results suggest that non-renewable energy
CO2 emissions consumption leads to a negative impact on economic growth for developing countries.
Renewable energy consumption Additionally, we nd that renewable energy consumption positively contributes to economic
Economic growth growth in the long run.

1. Introduction

Climate change relating to greenhouse gas emissions is a global problem not only in developed countries. According to the World
Bank, World Development Indicator, carbon dioxide (CO2) emissions of developing countries (China and India) account for 62%
(34%) of the world total in 2011. The question of whether, or to what extent, a reduction in CO2 emissions through reduced fossil
fuel usage has a negative eect on economic growth is a crucial issue for each country, especially developing countries with low
carbon eciency. Although a number of empirical researches have been carried out into the nexus between economic growth and
(total) energy consumption (e.g., Akinlo, 2008; Asafu-Adjaye, 2000; Eggoh et al., 2011; Joyeux and Ripple, 2011; Lee, 2005;
Mahadevan and Asafu-Adjaye, 2007; Ouedraogo, 2013), relatively few attempts have been made at the relationship between
emissions, renewable and non-renewable energy consumptions and growth for developing countries. For example, Apergis and
Payne (2009) stress using panel data for 6 Central American countries for the period 19712004 that there exists bidirectional
causality between energy consumption and emissions. Using panel data for 11 countries of the Commonwealth of Independent
States for 19922004 Apergis and Payne (2010a) state that energy consumption are positively associated with economic growth. The
authors also nd the existence of bidirectional causality between energy consumption and emissions. Similarly, Apergis and Payne
(2010b) address using data for 13 countries within Eurasia covering the period 19922007 that there exists bidirectional causality
between renewable energy consumption and economic growth. Apergis and Payne (2012) argue using panel data of 80 countries over
the period 19902007 that there is bidirectional causality between renewable and non-renewable energy consumption and economic
growth. Using panel data of 19 developed and developing countries covering 19842007 Apergis et al. (2010) argue the existence of
bidirectional causality between each pair of CO2 emissions, economic growth, nuclear energy consumption and renewable energy
consumption, except a weak unidirectional causality running from nuclear energy consumption to economic growth. Overall, most
existing empirical studies use Granger causality modeling via an error correction model (ECM). Regarding other literature, Sadorsky
(2009) uses fully modied ordinary least squares (FM-OLS) and states that a 1% rise in real income per capita leads to the growth of
renewable energy consumption per capita in 18 emerging countries by 3.5%. By using ordinary least squares (OLS) Fang (2011)

E-mail address: masakidaden@gmail.com.

http://dx.doi.org/10.1016/j.inteco.2017.02.001

2110-7017/ 2017 CEPII (Centre d'Etudes Prospectives et d'Informations Internationales), a center for research and expertise on the world economy. Published by
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Please cite this article as: Ito, K., International Economics (2017), http://dx.doi.org/10.1016/j.inteco.2017.02.001
K. Ito International Economics (xxxx) xxxxxxxx

argues that an increase in the consumption of renewable energy positively aects economic growth in China.
The purpose of this paper is to empirically investigate the link between CO2 emissions, economic growth, renewable and non-
renewable energy consumptions for developing countries. Dierent from previous studies in the literature, we employ not only a
generalized method of moments (GMM) technique but also the pooled mean group (PMG) technique, not Granger causality
approach. To the best of our knowledge, there has been no study that tried to estimate these variables for developing countries by the
GMM and the PMG.
The rest of the paper is organized as follows. Section 2 describes the data and methodology, while Section 3 provides the results
of the estimates. Section 4 concludes.

2. Data and methodology

2.1. Data

In our model we use an annual balanced panel data for 42 developing countries. The countries included are: Albania, Azerbaijan,
Bolivia, Bosnia and Herzegovina, Brazil, Bulgaria, Chile, China, Colombia, Costa Rica, Croatia, Cuba, Dominican Republic, Ecuador,
Egypt, Gabon, Hungary, India, Indonesia, Iran, Iraq, Jamaica, Jordan, Kazakhstan, Lebanon, Macedonia, Malaysia, Mauritius,
Mexico, Moldova, Morocco, Panama, Poland, Romania, Russia, South Africa, Thailand, Tunisia, Turkey, Uruguay, Uzbekistan and
Venezuela. The data cover the period 20022011, giving 420 observations. The variables used are as follows: carbon dioxide
emissions (CO2; metric tons per capita); consumption of fossil fuel energy such as coal, oil, petroleum and natural gas products
(FEC; as % of total); GDP per capita based on purchasing power parity (GDP) as a proxy of economic growth; and renewable energy
consumption (REC; as % of total nal energy use). All time series are taken from the World Bank, World Development Indicator
database (http://data.worldbank.org/indicator) and expressed in natural logarithms. The descriptive statistics of variables are
presented in Table 1.

2.2. Methodology

Considering the fact that the traditional panel OLS such as the xed or random eects model possesses the endogeneity problem,
we apply the dierence GMM estimator, proposed by Arellano and Bond (1991), for a dynamic panel model with lagged dependent
variables. The GMM, which is a form of instrumental variable estimation, relaxes the assumptions of both serial correlation and
heteroskedasticity. The GMM model is given by:
Yit Yit 1 = (Yit 1 Yit 2 ) + (Xit Xit 1) + (it it 1) (1)
with the following moment conditions:
E [Yit s (it it 1)] = 0 for s 2; t = 3, , T , (2)

E [Xit s (it it 1)] = 0 for s 2; t = 3, , T . (3)

As a robustness check, taking into account that the GMM procedure is likely to produce inconsistent and misleading long-run
coecients due to the assumption of homogeneity of slope parameters or due to the exclusion of any potential long-run relationship
among the variables (Pesaran and Smith, 1995), we use the PMG estimator based on the autoregressive distributed lag (ARDL)
model introduced by Pesaran et al. (1999). The estimator restricts the long-run coecients to be equal across the panel, but the
intercepts, short-run coecients and error variances are allowed to dier across groups. The PMG model can be written as:
p q
Yit = ij Yi, t j + ij Xi, t j + i + it
j =1 j =1 (4)
where Xi, t j is the (k 1) vector of explanatory variables for group i and i represents the xed eects. This model can be rewritten
as:
p 1 q 1
Yit = i (Yi, t 1 i Xi, t 1) + ij Yi, t j + ij Xi, t j + i + it
j =1 j =1 (5)
where the i are the long run parameters and i are the error correction parameters. The pooled mean group restriction is that the

Table 1
Summary of descriptive statistics.

Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis

CO2 1.2059 1.2809 2.7600 0.0953 0.6253 0.1715 2.1796

FEC 4.3889 4.4630 4.6031 3.4965 0.2100 1.8628 6.8602
GDP 9.1840 9.2446 10.0258 7.6734 0.5031 0.8229 3.3164
REC 2.4765 2.6581 4.3315 1.2729 1.0868 0.7597 3.2724

Notes: All variables are expressed in their logarithms.

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Table 2
Results for panel unit root tests.

LLC IPS

Log levels First differences Log levels First differences

CO2 6.637(0.000)* 10.731(0.000)* 0.518(0.302) 4.439(0.000)*

FEC 1.206(0.113) 4.081(0.000)* 1.130(0.129) 4.482(0.000)*
GDP 10.721(0.000)* 14.404(0.000)* 1.857(0.031)* 2.165(0.015)*
REC 4.430(0.000)* 6.613(0.000)* 0.742(0.771) 3.014(0.001)*
BN
Test statistics (A) p-values Test statistics (B) p-values

CO2 1.714 0.043 30.842 0.057

FEC 0.372 0.645 17.643 0.610
GDP 3.456 0.000 41.858 0.002
REC 2.115 0.017 33.378 0.030

Notes: Probabilities for the tests assume asymptotic normality. * indicates signicance at the 5% level. Newey-West bandwidth selection using Bartlett kernel is
applied for the test. Panel unit root test includes intercept and trend. With regard to the BN test, test statistics (A) and (B) refer to the respective Choi (2001) and
Maddala and Wu (1999) pooled unit root test statistic on idiosyncratic components.

elements of are common across countries, thus

p 1 q 1
yit = i ( yi, t 1 xi, t 1) + ij yi, t j + ij xi, t j + i + it .
j =1 j =1 (6)

3. Empirical results

Before conducting panel regressions, the null hypothesis of non-stationary are tested for common unit root process by Levin et al.
(2002, LLC) and for individual unit root process by Im et al.(1997, IPS). Table 2 reports the results of the panel unit root tests. It is
observed that the null hypothesis of a unit root in log levels cannot be rejected for both tests (except for GDP), but all variables are
stationary in rst dierences at the 5% level of signicance. Overall, the results suggest that all variables are stationary I(1). Next,
considering that the rst generation tests such as the LLC and the IPS are based on the cross-sectional independency hypothesis, we
apply the second generation tests of Bai and Ng(2004, BN), which allow for the cross-sectional dependence, as a robustness test. The
results of the BN test show that all variables except for FEC are stationary, thus supporting the results of the LLC test.
Table 3 presents estimation results from the GMM and the PMG model using the ARDL (1,1,1,1). We observe that all estimated
coecients in columns (1) to (4) are statistically signicant at the 1% level (except for FEC in column (1) of Table 3-3 and GDP in
columns (2)-(3) of Table 3-4). It is observed that all p-values of the Sargan test exceed the conventional signicance level of 0.05,

Table 3-1
Results of GMM and PMG long-run estimates.

Dependent variable: CO2

Variables GMM PMG

(1)1 (2) (3) (4)

CO2(1) 0.239* 0.253* 0.265* 0.249*

(0.014) (0.014) (0.009) (0.011)

FEC 0.725* 0.563* 0.610* 0.933* 0.148

(0.084) (0.106) (0.087) (0.054) (0.145)

GDP 0.136* 0.128* 0.130* 0.131* 0.342*

(0.013) (0.013) (0.007) (0.007) (0.007)

REC 0.249* 0.240* 0.133* 0.114* 0.100*

(0.025) (0.026) (0.010) (0.007) (0.020)

Observations 336 336 336 336 378

J-statistic 38.248 37.960 35.363 37.005
Sargan test (p-value) 0.243 0.253 0.357 0.376

Notes: * denotes signicance at the 1% level. All variables are expressed in their logarithms. Standard errors are reported in parentheses. Instrument variables are as
follows: CO2(lagged) and FEC in model (1); CO2(lagged) and GDP in model (2); CO2(lagged) and REC in model (3); and CO2(lagged), FEC, GDP and REC in model
(4). The null hypothesis of the Sargan test is that the over-identifying restrictions are valid.

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Table 3-2
Results of GMM and PMG long-run estimates.

Dependent variable: FEC

Variables GMM PMG

(1) (2) (3) (4)

FEC(1) 0.264* 0.265* 0.358* 0.338*

(0.010) (0.012) (0.018) (0.008)

CO2 0.082* 0.186* 0.204* 0.109* 0.000**

(0.005) (0.003) (0.006) (0.003) (0.000)

GDP 0.018* 0.042* 0.046* 0.025* 0.003*

(0.002) (0.002) (0.004) (0.001) (0.000)

REC 0.085* 0.080* 0.017* 0.035* 0.012*

(0.007) (0.007) (0.004) (0.003) (0.000)

Observations 336 336 336 336 378

J-statistic 31.877 28.872 30.866 33.747
Sargan test (p-value) 0.522 0.672 0.573 0.528

Notes: * and ** denote signicance at the 1% and 5% level, respectively. All variables are expressed in their logarithms. Standard errors are reported in parentheses.
Instrument variables are as follows: FEC(lagged) and CO2 in model (1); FEC(lagged) and GDP in model (2); FEC(lagged) and REC in model (3); and FEC(lagged),
CO2, GDP and REC in model (4). The null hypothesis of the Sargan test is that the over-identifying restrictions are valid.

thereby indicating the validity of the instruments. As can be seen from Table 3-1, the coecients from GMM models show, as
expected, that an increase in FEC and GDP, respectively, leads to an increase in CO2, whereas a rise in REC contributes to a decrease
in CO2, ranging from 0.11% to 0.25%. Overall, it is noticeable that the coecient of FEC is relatively large, ranging from 0.56% to
0.93%. As for the PMG long-run estimates, the signs of coecients are consistent with the GMM results, although the coecient of
FFC is not statistically signicant. With respect to the equation for FEC in Table 3-2, both results indicate that an increase in GDP
and REC, respectively, leads to a decrease in FEC, but the magnitude of the PMG coecients is small. Regarding the equation for
GDP in Table 3-3, it is observed that the growth of FEC negatively contributes to GDP growth, contradicting the nding of Apergis
and Payne (2012). As noted by Squalli (2007), this negative relationship may be explained by the possibility of excessive energy
consumption in inecient sectors. Furthermore, the GMM result shows that REC growth has a negative eect on GDP, whereas that
of the PMG reveals the positive impact. This may be attributed to the high initial investment cost in renewable energy sector. As for
the REC equation in Table 3-4, both results indicate that FEC growth leads to the decline in REC, thus suggesting the possibility of
substitution between them. At the same time, the results from GMM reveal that the growth of GDP negatively aects the REC

Table 3-3
Results of GMM and PMG long-run estimates.

Dependent variable: GDP

Variables GMM PMG

(1) (2) (3) (4)

GDP(1) 0.910* 0.865* 0.857* 0.897*

(0.005) (0.005) (0.005) (0.003)

CO2 0.066* 0.309* 0.332* 0.135* 1.722*

(0.004) (0.007) (0.008) (0.003) (0.039)

FEC 0.009 0.540* 0.201* 0.331* 0.177

(0.037) (0.022) (0.021) (0.020) (0.467)

REC 0.110* 0.082* 0.011* 0.073* 0.488*

(0.004) (0.001) (0.002) (0.001) (0.069)

Observations 336 336 336 336 378

J-statistic 39.841 40.157 40.489 41.734
Sargan test (p-value) 0.191 0.182 0.173 0.201

Notes: * denotes signicance at the 1% level. All variables are expressed in their logarithms. Standard errors are reported in parentheses. Instrument variables are as
follows: GDP(lagged) and CO2 in model (1); GDP(lagged) and FEC in model (2); GDP(lagged) and REC in model (3); and GDP(lagged), CO2, FEC and REC in model
(4). The null hypothesis of the Sargan test is that the over-identifying restrictions are valid.

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Table 3-4
Results of GMM and PMG long-run estimates.

Dependent variable: REC

Variables GMM PMG

(1) (2) (3) (4)

REC(1) 0.281* 0.240* 0.256* 0.259*

(0.006) (0.007) (0.008) (0.006)

CO2 0.140* 0.276* 0.223* 0.244* 2.580*

(0.010) (0.013) (0.015) (0.014) (0.248)

FEC 2.132* 1.195* 2.518* 1.369* 0.102

(0.270) (0.131) (0.289) (0.134) (0.456)

GDP 0.034* 0.029** 0.010 0.043* 1.491*

(0.010) (0.012) (0.012) (0.011) (0.139)

Observations 336 336 336 336 378

J-statistic 34.204 32.945 35.027 36.127
Sargan test (p-value) 0.409 0.469 0.372 0.415

Notes: * and ** denote signicance at the 1% and 5% level, respectively. All variables are expressed in their logarithms. Standard errors are reported in parentheses.
Instrument variables are as follows: REC(lagged) and CO2 in model (1); REC(lagged) and FEC in model (2); REC(lagged) and GDP in model (3); and REC(lagged),
CO2, FEC and GDP in model (4). The null hypothesis of the Sargan test is that the over-identifying restrictions are valid.

growth, whereas the PMG estimate shows the opposite result, which is estimated to be approximately 0.49%. This latter result is in
line with the nding of Sadorsky (2009).

4. Conclusion

In this paper, based on the dierence GMM and the PMG using annual balanced panel data for 42 developing countries over the
period 20022011, we have attempted to examine the relationship between CO2 emissions, economic growth, fossil fuel energy
consumption and renewable energy consumption. Our empirical ndings are as follows: (i) renewable energy consumption
contributes to reductions in emissions; (ii) renewable energy consumption has a positive eect on the economic growth in the long
run; (iii) non-renewable energy consumption has a negative eect on economic growth in the long run; and (iv) there exists a
substitute relationship between non-renewable energy and renewable energy consumptions.
Overall, our ndings suggest that policy makers in developing countries should focus on investing in the development of
renewable energy sector, thereby enhancing energy self-reliance and generating sustainable economic growth and employment. In
order to attain this goal, it is indispensable for those countries to receive nancial and technological assistance from developed
countries. At the same time, given that mitigation of emissions at global level can only be achieved through an international
corporation, these development assistance projects are also signicantly important for developed countries. On the other hand, the
governments of developing countries are expected not only to establish renewable energy systems (such as solar, wind, small-scale
hydro, and biomass plants) according to geographical and climatic conditions, but also to expand the renewable energy market by
fossil fuel tax and incentives (such as subsidies, tax exemption, and feed-in taris).
Notwithstanding its limitations, we believe that this study contributes to existing literatures on the linkage between emissions,
energy and growth.

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