The impact of economic growth, trade openness and manufacturing on CO2 emissions in India: an autoregressive distributive lag (ARDL) bounds test approach.
| Autor | Karedla, Yaswanth |
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Introduction
The genesis of globalization was based on the idea of free trade amongst countries as promulgated by Adam Smith in his seminal work--The Wealth of Nations. Historically, production and trade have been our bedrock of economic growth spanning across ancient civilizations to the contemporary world. Climate change as an objective reality has dawned upon our collective conscience in the late 19th century. It is lately that governments have realized the significance of environmental conservation and its perils in case of any further degradation, thus leading to policy formulation around sustainable development (Chowdhury et al, 2021; Dale et al, 2020; Xu et al, 2021). This realization has led to several multilateral initiatives being undertaken by the conscience-stricken international community through the way of globally inclusive platforms such as the Stockholm Conference, Montreal Protocol, Rio Convention, Kyoto Protocol, the recent Paris Agreement, etc. (Wang and Wiser, 2002; Jacquet and Jamieson, 2016).
Modern day consumerism and consumption have imparted substantial momentum to economic growth, which has been largely responsible for the financial upliftment of many countries. Nevertheless, climate change has been a negative externality of this relentless human pursuit. An ample of studies indicates that economic growth often contributes to environmental degradation (Bekun et al, 2019; Song, 2021). The environmental Kuznets curve (EKC) hypothesis proposed by Grossman and Krueger (1995) delineates that during the initial stages of a country's economic development, its environmental degradation increases but gradually subsides at the turning point after attaining a certain level of industrialization. In the context of developing countries, it becomes imperative for policymakers to optimize the trade-off between economic growth and ecological conservation.
Globalization has been an important proponent of trade openness for emerging economies. From a theoretical sense, trade openness has three far-reaching implications on pollution viz. scale effect, composition effect and technology effect (Antweiler et al, 2001). The scale effect implies that an increase in trade leads to an increase in energy consumption, which in turn causes increased environmental degradation. The composition effect revolves around the premise that comparative advantages inherent to a country decide its production composition for the prevalence of either labor or capital-intensive industries. As per the factor endowment hypothesis (FEH), the latter is more polluting, in nature, than the former. Third, the technology effect expounds that increased trade causes greater facilitation of technology transfer amongst trading partners, which results in the adoption of cleaner and more efficient practices.
Developing economies like India tend to have a major share of non-renewable energy sources as a part of their energy consumption mix. Moreover, being amongst the most densely populated country, the scope for raising ecological footprint increases (Sharma et al, 2021). The increased energy demand for powering industrial activity of a developing nation leads to elevated pollution levels. This is in concurrence with several studies that have investigated the nexus between manufacturing and CO2 emissions (Canh et al, 2019; Rahman and Kashem, 2017; Zafar et al, 2020).
Our research aims at exploring the interplay between economic growth, trade openness and degree of industrialization with carbon emissions in the context of India. We have deployed the autoregressive distributive lag (ARDL) bounds test approach as the statistical methodology for ascertaining empirical relationships amongst the variables under study. There exists a dearth of studies about emerging economies, and our study on one of the largest emerging economies, India, shall prove to be an important source of knowledge for understanding such implications.
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Literature review
EKC hypothesis is the most popular theory that links the effect of economic growth on the environment; it was the first empirical study of Grossman and Krueger (1995). The theory asserts that there is an inverted relationship between pollution and economic growth. As the economy grows beyond a certain level, it tries to achieve technological advances, which will lead to control the pollution. Shahbaz and Sinha (2019) and Purcel (2020) provide very extensive literature on the EKC hypothesis. Kilavuz and Dogan (2020) modeled economic growth, openness, industry and CO2 emissions during 1961-2018 for Turkey. They observed industry and economic growth contribute to CO2 emissions positively, while trade openness does not have any effect on CO2 emissions.
Trade openness indicates the degree to which an economy is open to trade across the world economies. It helps countries to increase exports that intend to increase domestic production, by increasing the scale of industries, which leads to increased pollution (Jun et al., 2020). Concerning the relationship between pollution and trade openness, there seems tobeno consensus. Across the several countries studied, pollution levels have increased with increased trade openness (Al-Mulali et al., 2016; Jun et al., 2020; Lin, 2017; Wen and Dai, 2020). However, few believe that the increase in trade openness reduces pollution (Ghazouani et al., 2020; Kohler, 2013; Shahbaz et al., 2017). While few observe differences in the relationship based on the economic income. For example, Wang and Zhang (2021) observed that the relationship between pollution and trade openness is positive for low-income countries, while it is negative for high- and middle-income countries. Greater trade openness and FDI are expected to increase emissions in developing economies with fewer environmental regulations (Sajeev and Kaur, 2020). Jayanthakumaran et al. (2012) also observed a negative relationship in China and a positive relationship in the case of India.
Manufacturing positively contributes toward pollution levels in industrialized economies (Rauf et al., 2018). The primary reason for pollution from manufacturing is that they heavily rely on fossil fuel energy. Industrial production and energy consumption have significant positive impacts on carbon emissions (Rahman and Kashem, 2017). To achieve higher economic growth, manufacturing activities require higher energy consumption, and in absence of abundant renewable energy sources, these activities rely more on non-renewable sources. Energy consumption and economic growth have a positive and statistically significant association (Esen and Bayrak, 2017). Hence, the use of non-renewable sources leads to environmental degradation. Industrial production is the driving force of CO2 emissions (Hocaoglu and Karanfil, 2011). Zafar et al. (2020) examined the role of industrialization in environmental pollution for 46 Asian countries. They observed a significant and positive impact of industrialization on carbon emissions. Most of the researchers have observed a positive relationship between manufacturing activities and pollution (Banerjee and Rahman, 2012; Canh et al., 2019; Lin et al., 2014).
A large number of studies have examined the linkages between economic growth and environment after the most popular EKC theory Grossman and Krueger (1995). Most of the studies found a positive relationship between economic growth and pollution (Alshehry and Belloumi, 2015; Menyah and Wolde-Rufael, 2010; Pao and Tsai, 2011; Park and Hong, 2013; Song, 2021). Rajpurohit and Sharma (2021) observed that moderate economic growth and moderate financial development increase carbon emissions, whereas exponential growth and financial development decrease carbon emissions. Dey and Tareque (2020) observed a negative impact of external debt on GDP growth. Shabbir et al. (2020) examined the role of natural resources in economic growth for Pakistan during 1972-2016. They examined the relationship of population density, water renewable resources, CO2 and deforestation on the GDP. They observed a negative and significant relationship of all the variables with GDP. Rasool et al. (2020) examined the curvilinear relationship between environmental pollution and economic growth in India during 1971-2014. They identified that energy consumption, economic growth and financial development have negative effects on the environment.
India is one of the fastest-growing economies of the world and it is also the third-largest carbon emitter. With the ambitions of high economic and industrial growth, the emissions are going to increase substantially because...
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