Causality between Pollution Emissions and Economic Growth (The Case of Oil Exporting Countries)

Empirical studies of the Environmental Kuznets Curve (EKC) examine the presence of an inverted U-shaped relationship between the level of pollution and income. In this context, generally it is presumed that the relationship between income and pollution is one of the unidirectional causality with income causing environmental changes and not vice versa. The validity of this presumption is now being questioned. It is asserted that the nature and direction of causality may vary from one country to the other. In this study, the causality between per capita CO2 emission (PCEMISSION) and per capita GDP (PCGDP) has been examined using a cross country panel of 23 oil exporting countries from 1970 to 2005. The results of the test in case of homogeneous non-causality in homogeneous panels and the test of heterogeneous non-causality in homogeneous panels suggest that there is a unidirectional causality running from PCGDP to PCEMISSION in shortrun and bi-directional causal relationship in longrun. Furthermore, the results of the test of homogeneous non-causality in heterogeneous panels suggest that there is a bi-directional causal relationship between PCGDP and PCEMISSION. The results of causality tests for individual countries indicate that the direction of causality between PCGDP and PCEMISSION varies between different oil exporting countries. In fact, it seems that the nature of income–emission causality an economy experiences depends on some structural features of the economy under investigation.