A Cross-Sectoral Investigation of the Energy–Environment–Economy Causal Nexus in Pakistan: Policy Suggestions for Improved Energy Management

Abstract

This paper explored the energy–environment–economy (EEE) causal nexus of Pakistan, thereby reporting the causal determinants of the EEE nexus by employing the newly developed modified Peter and Clark (PC) algorithm. The modified PC algorithm was employed to investigate the causal ordering of energy consumption, CO2 emissions and economic growth across Pakistan’s domestic, industrial, transportation and agricultural sectors. An empirical comparison, i.e., following Monte Carlo simulation experiments demonstrates that the proposed modified PC algorithm is superior to the original PC proposition and can differentiate between true and spurious nexus causalities. Our results show that significant causality is running from energy consumption in industrial and agricultural sectors towards economic growth. There is no causal association between energy consumption and economic growth in the domestic and transportation sectors. On the other hand, causality runs from energy consumption in the transportation, domestic and industrial sectors towards CO2 emissions. It is concluded that energy consumption in industrial and agricultural sectors leads to economic growth alongside the associated CO2 emissions. On the other hand, the contribution of domestic and transportation sectors in economic growth is trivial with significant CO2 emissions. This paper provides novel empirical evidence of impacts of energy mismanagement at sectoral levels, economic output and environmental consequences; alongside policy recommendations for sustainable energy-based development on the national scale.