Income and emission: A panel data-based cointegration analysis

This paper presents the results of an investigation of the causality issue of income-emission relationship based on time series econometric techniques of unit root test, cointegration and related error correction model applied to a panel data set. Here, the nature of causality between per capita CO2 emission (PCCO2) and per capita GDP (PCGDP) has been examined using a cross country panel data set of yearly observations covering 88 countries and the time period 1960-1990. Using the panel unit root test procedure of Im et al. (2003) [Im, K.S., Pesaran, M.H., Shin, Y., 2003. Testing for unit roots in heterogeneous panels, Journal of Econometrics 115, 53-74] (IPS), it has been found that the null hypothesis of presence of a unit root (i.e., non-stationarity) of the time series of PCGDP and PCCO2 cannot be rejected for most of the country-groups. The panel data cointegration tests have been performed next. Finally, the ECM has been estimated to explore the nature of the short run dynamics of the PCGDP-PCCO2 relationship for those country-groups for which PCGDP and PCCO2 are observed to be cointegrated. The results obtained suggest that there is more or less a bi-directional causal relationship between PCGDP and PCCO2 for Africa, Central America, America as a whole, Eastern Europe, Western Europe, Europe as a whole and the World as a whole. That means, the movement of the one variable directly affects the other variable through a feedback system. This result should be of concern to policy makers as this has obvious implication for possible feedback effect of a policy of emission control.