Examining the Relationship Between Energy Consumption, Economic Growth and Environmental Degradation in Indonesia: Do Capital and Trade Openness Matter?

Abstract

This paper examines the relationship between energy consumption, economic growth, and environmental degradation in Indonesia in 1965-2018 with the inclusion of gross capital formation and trade openness as relevant factors. The autoregressive distributed lag model to cointegration, fully modified ordinary least squares, dynamic ordinary least squares, and canonical cointegrating regression approach applied to estimate this relationship. The result of cointegration confirms the existence of a cointegration relationship between energy consumption, economic growth, gross fixed capital formation, trade openness, and environmental degradation. The empirical result, in the long run, indicates that energy consumption, economic growth, and trade openness have a positive relationship with environmental degradation. However, the gross fixed capital formation was found to be negatively associated with environmental degradation. This implying that gross fixed capital formation plays a pivotal role to reduce environmental degradation in Indonesia. The error correction model coefficient indicates that the deviation of CO2 emissions from its long run equilibrium will be adjusted by 0.53% through the short run channel per annual. The findings of this paper propose implementing an energy policy that focuses on energy from environmentally friendly sources. Reverse the effect of openness to the international markets to improve and facilitate access to advanced and environmentally friendly technologies to mitigate environmental degradation and improve environmental quality.

International trade and consumption‐based carbon emissions: Does energy efficiency and financial risk ensure sustainable environment?

“…IM intensify CCO 2 due to industrial activities, which depend primarily on fossil fuel and oil energy. Furthermore, manufacturing expansion‐based economic activities will lead to increased energy consumption, negatively influencing environmental quality through rising CO 2 emissions (Anwar & Elfaki, 2021; Hassan et al, 2021; Khan, Ali, Umar, et al, 2020).…”

The Impact of Industrialization, Trade Openness, Financial Development, and Energy Consumption on Economic Growth in Indonesia

“…However, as manufacturing expands, energy use will increase, and energy consumption has a negative influence on environmental quality by increasing CO 2 emissions, which indirectly affect economic growth. In addition, trade allows countries access to contemporary technology and supports FDI flows, which encourages the development of clean industries (Anwar and Elfaki 2021). As industrialization increases, resource depletion resurfaces and negatively affects the general well-being of the wider population (Mahmood et al 2020).…”

The Influence of Economic Growth and Energy Consumption on Environmental Degradation in Pakistan

“…In contrast, the other variables are insignificant in the short run. In the long run, energy consumption and economic growth both significantly and positively impact CO2 emissions (Anwar & Elfaki, 2021;Muhammad, 2019;Qi et al, 2022;Wen et al, 2021). If energy consumption is increased by one percent it will increase CO2 emission by 0.0126 percent.…”

“…This is why exploring the relationship between EG, EC, and EG is very significant for the consumers and all the stakeholders of Pakistan, particularly the policymakers of Pakistan. Anwar and Elfaki (2021) described that the emission of several adverse gases causes the key issue of environmental degradation due to using different sources of energy consumption. These harmful gases released from energy consumption are methane, carbon dioxide, and nitrogen gases.…”