Testing the long-run effects of economic growth, financial development and energy consumption on CO2 emissions in Turkey: new evidence from RALS cointegration test

Abstract

This study analyses the long-run effects of economic growth, energy consumption and financial development on carbon dioxide (CO2) emissions in Turkey using annual time series data for the period 1965-2018. This research investigates the relationship between the variables using a RALS-EG (residual augmented least squares-Engle and Granger) cointegration test procedure developed by Lee et al. Stud Nonlinear Dyn Econ 19:397-413, (2015). In addition, this study uses a bootstrap causality analysis developed by Hacker and Hatemi-J J Econ Stud 39:144-160, (2012) to specify the causal relationship between the series. RALS cointegration test results show a long-run relationship between CO2 emissions and economic growth, energy consumption and financial development. According to a dynamic ordinary least squares estimation, economic growth has a negative and statistically significant effect on CO2 emissions, whereas energy consumption and financial development have positive and statistically significant effects on CO2 emissions in the long run. In particular, energy consumption is the most effective parameter of environmental pollution in Turkey. However, the causality test results indicate a unidirectional causal relationship from financial development to CO2 emissions, economic growth and energy consumption. Increasing the investment in renewable energy sources will be an effective policy tool to improve the environmental quality in Turkey.