Empirical investigation of relationships between energy consumption, industrial production, CO2 emissions, and economic growth: the case of small island states

Abstract

This study explores the long-run equilibrium relationship between CO2 emissions, economic growth, and industrial production. In parallel, the energy-led growth hypothesis has been investigated for a selected group of 23 small island states globally chosen from different continents. Data used in the analysis covers the period 1977-2017 on an annual basis and is retrieved from the World Bank open data and national statistical authorities. FMOLS and DOLS panel estimation techniques have been implemented throughout the study, and FMOLS cointegration results reveal that there is a significant and economically sound relationship between industrial production, economic growth, and carbon dioxide emissions among the selected small island nations. Dynamic OLS panel estimation results also provide empirical evidence that industrial production is a significant determining factor for carbon dioxide emissions for the so-called small island states. Vector error correction estimations also provide strong empirical evidence that economic growth causes carbon dioxide emissions with a significant coefficient in the short-run. Panel Granger causality results also indicate that there is a significant bidirectional causal relationship between industrial growth and carbon dioxide emissions among the selected 23 small island states. As a result, the energy-led growth hypothesis for small island states has been validated in this study.