Decoupling economic growth from carbon dioxide emissions in the EU countries

Abstract

This paper aims to look at the long-run equilibrium relationship between CO2 emissions and economic growth (the EKC hypothesis) in an asymmetric framework using the non-linear threshold cointegration. In order to avoid the problem of omitted variables bias, the dynamic relationship between pollutant emissions, economic development and energy consumption are also examined (the extended EKC model). The research hypothesis is that the economic growth decouples from CO2 emissions growth, i.e. the EKC hypothesis holds. The empirical study is carried out for the European Union countries (EU-14) divided into three groups depending on a category of knowledge-advanced economies in order to explain the differences in the dynamic linkage between CO2 emissions and economic growth, as well as in the energy consumption impact on this cointe-grating relationship. We have found that the EKC hypothesis is valid for the most high-level and some middle-level knowledge advanced economies. The addition of energy consumption to the standard EKC model has improved the results in terms of the presence of linear or threshold cointegration for all low-level knowledge based economies. Moreover, the causality pattern between CO2 emissions and income has changed after energy consumption adding to the EKC model and some similarities are found in the countries belonging to the same category of knowledge-advanced economies.