Environmental implication of offshore economic activities in Indonesia: a dual analyses of cointegration and causality

Abstract

Global warming issues have become a pertinent theme for many economies and policy initiatives. The Indonesian economy is no exception as government officials and stakeholder are working seriously to decouple carbon emission from economic growth. It is on this premise that the present study attempts to investigate the nexus between the environmental implication of offshore economic activities, economic growth, energy use, and environment (CO2) with the integration of foreign direct investment (FDI) and trade openness over recent time series data from 1980 to 2017. A series of analysis were conducted with Pesaran's autoregressive distributed lag (ARDL) methodology and the Granger causality test as estimation techniques over the outlined variables. Empirical findings from ARDL long-run (elasticity) shows that economic growth is significantly positively associated with carbon emissions at the initial stage but a negative association is established at lags 1 and 2. A significant positive relationship is witnessed between economic growth and FDI. Also, statistical positive relationship is observed between economic growth and energy use, while an inverse relationship is observed between openness and economic growth. For causality analysis, we observe that a uni-directional causality is running from economic growth to foreign direct investment at 5% significant level. This outcome is in support of the growth-induced FDI hypothesis in Indonesia. Furthermore, a one-way causality is seen from energy to openness, CO2 emissions, and from FDI to CO2 emissions while there is a feedback causality between openness and CO2 emissions. The findings of this study have implications to the environmental quality of Indonesia via economic growth; hence, the higher and better the economic growth of the country, the lesser the carbon emissions and the better the environmental quality. This proposition aligns with the pollution halo hypothesis (PHH), where FDI inflow enhances economic growth as well as impacts energy consumption and reduces carbon emissions in the host country.