On the Dynamics of Energy Consumption, CO2 Emissions and Economic Growth: Evidence from India

There are number of studies that examine the bidirectional causality between CO2 emissions and economic growth, CO2 emissions and energy consumption and energy consumption and economic growth. This study has made an attempt to extend the same into multivariate framework and employ new time series approach. After examining cointegration in multivariate framework among the variables in the presence (by employing Saikkonen and Lütkepohl’s approach) and absence of structural breaks (by employing Johansen’s approach) we examined causality in both static and dynamic framework among energy consumption, CO2 emissions and economic growth for India using Granger approach (in VECM framework), impulse response functions (IRFs) and Variance Decomposition(VDs). Static causality reveals that CO2 emissions Granger-cause GDP, while energy consumption does not Granger-cause GDP. GDP does not Granger-cause CO2 emissions while energy consumption Granger-causes CO2 emissions and CO2 emissions Granger-causes energy consumption. Under dynamic causality, forecast error variance of GDP is explained more by CO2 emissions compared to energy consumption. Further, forecast error variance of CO2 is explained more by energy consumption compared to GDP. Therefore, the energy policy in the country should be conservative and energy should be efficiently utilized because energy consumption does not contribute much to the growth of the economy on one hand and it increases CO2 emissions to a larger extent on the other.