The carbon footprint of capital formation: An empirical analysis on its relationship with a country's income growth

Infrastructure development, often referred to as fixed capital formation, is imperative for developing countries not only to provide essential services but also to drive their economic activities. Capital investments, on the other hand, have been accused of expediting resource depletion and environmental degradation, including climate change, because infrastructure construction requires significant amounts of resource and energy inputs that inevitably accompany carbon dioxide emissions. Considering that the upscaling of Western‐type infrastructure stocks to the global level may easily compromise the 2°C target under the Paris Agreement, it is crucial to understand how capital formation by developing countries affects their carbon footprint (CF) and explore ways to avoid its excessive accumulation. This study aims to empirically find out how CF from capital formation evolves along various countries' development pathways by employing the multi‐regional input–output model with a particular focus on the gross fixed capital formation as the final‐demand category. It also aims to identify well‐performing countries that make growth with fewer CFs from capital formation and assess the reasons behind it through structural decomposition analysis. It has been found that the developing countries that invested in more carbon‐intensive capital formation achieved faster economic growth. In order to pursue carbon‐neutral growth globally, these countries need to lower their CFs through the proactive improvement of their emission coefficient and energy efficiencies. Proper environmental space for CF accumulation needs to be left for the low‐income developing countries to make investments for their future capital formation and income growth.