Interactions among energy consumption, CO2, and economic development in European Union countries

Sustainable development has become a major problem in European Union (EU) countries. This has prompted many researchers to examine a broad range of interactions among sustainable development indicators. This study uses the variance decomposition and cointegration approach to assess the causal relationship among energy consumption, CO2 emissions, and economic development (gross domestic product [GDP], foreign direct investment [FDI], net exports, and employment in industry) in the eight new and 15 old EU countries. The results confirm the existence of at least long‐run equilibrium relationships among economic growth and energy consumption, CO2, FDI, and net exports. In addition, short‐run bidirectional causality among GDP, energy consumption, and CO2 emissions is found for the old EU countries, whereas unidirectional causalities run from GDP to energy consumption and CO2 emissions in the new EU countries. Evidence from the variance decomposition analysis shows that 22% of the future shock in GDP is due to fluctuations in energy consumption, CO2, and employment in the old EU countries, whereas 53.1% emanates from CO2, employment, and FDI in the new EU countries. These findings have potentially important implications for sustainable development and environmental policy in both old and new EU countries.