CO2 Emissions, Foreign Direct Investments, Energy Consumption, and GDP in Developing Countries: A More Comprehensive Study using Panel Vector Error Correction Model

Abstract

This paper examines the causal relationships among carbon dioxide (CO2) emissions, energy consumption, gross domestic product (GDP), and foreign direct investments (FDI) in 57 developing countries from 1980 to 2013. The results of the analysis based on panel vector error correction model (VECM) indicate no direct short-run causality exists from FDI to CO, emissions. These results are also confirmed by regional analysis, wherein the developing countries are divided into three regions. In the long run, a cointegrated relationship is found among CO, emissions, energy consumption, GDP, and FDI, which supports the environmental Kuznets curve hypothesis. However, the long-run elasticity of FDI on CO, emissions is very small even though it is statistically significant. These results do not support the pollution haven hypothesis of CO, emissions through inward FDI in developing countries.