An Indian story on carbon emission, energy consumption, trade openness, and financial development

• Author: Priyanka Menon
• Published date: 01 November 2019
• DOI: http://doi.org/10.1002/pa.1953
• Date: 01 November 2019

ACADEMIC PAPER

An Indian story on carbon emission, energy consumption, trade

openness, and financial development

Priyanka Menon

Department of Economics‐Finance, Institute

for Financial Management and Research

(IFMR), Chennai, Tamil Nadu, India

Correspondence

Priyanka Menon, Department of Economics‐

Finance, Institute for Financial Management

and Research (IFMR),No. 24 Kothari Road

Nungambakkam, 600034 Chennai, Tamil Nadu,

India.

Email: priyanka.hmenon@gmail.com; priyanka.

menon@ifmr.ac.in

This paper empirically studies the impact of energy consumption, financial develop-

ment, and trade openness on India's carbon emission for 1971 to 2014 and validates

the environmental Kuznets curve hypothesis for India. The Autoregressive Distrib-

uted‐lagged model (ARDL) bound test is used to test the existence of cointegration

among the key variables. The results exhibit a U‐shaped relationship between carbon

emission and energy consumption in the long run. Through this study, we find out the

maximum threshold value of energy consumption per capita to 757 kg of oil equiva-

lent, which is above the current consumptions levels—indicating a rise in carbon emis-

sion shortly.

Further, the long‐run results show that a 1% increase in trade openness will decrease

carbon emission by 0.11%, which is a display of technological effect over scale effect

and composition effect. Financial development does not exhibit a significant relation

to carbon emission. The results are in line with the literature on climate change in

emerging countries. This empirical work gives some insight into policy issues that

have to be looked into further.

1|INTRODUCTION

The rising temperature is an increasing concern to all. It is not a con-

cern of “he,”“she,”or “they”; it is each one of us who are the stake-

holder to the repercussions of the climate change. The World

Economic Forum (2016) classifies climate change as one of the leading

risks to the entire world, which makes it not just an ecological issue; it

is, in fact, a threat to humankind, making it a social and economic con-

cern as well. Therefore, climate change and global warming are the

subject of the foremost concern of our times. In simple words, climate

change could be explained as changes in the general weather condi-

tions for an extended period, which disrupt the natural carbon cycle

of the atmosphere, and hence, there is an excess of the greenhouse

gases in the atmosphere, therefore harming the ecosystem. The scien-

tists around the world agree that the mount up of carbon dioxide that

is released on the use of fossil fuels and further, human‐induced

greenhouse gases emitted from their day to day activities are the prin-

cipal reason for the warming of the earth's atmosphere and ocean

(IPCC, 2014). The United Nation proclaim that cooperation from all

the countries in the world is a precondition for the success of any

environmental strategy (UN, 1972).

In the recent past, we could see that there is active participation in

fighting the effects of climate change around the globe, with few

countries taking up this cause very seriously. Economists generally

consider climate change as a failure of the market, as climate change

is caused by greenhouse externality, which is a byproduct of econom-

ically productive activities (Bowen, Dietz, & Hicks, 2012). Time and

again, the impact of these economic activities is not directly affecting

the ones involved in it. Instead, they pose a threat to the future gen-

erations and the people from developing countries, as typically, the

impacts are long term. We find that the economist has a general con-

cern about this market failure; hence, they insist on government inter-

vention. Therefore, they came up with the concept of polluter pays

principle, that is, pricing the carbon emission.

However, one must be aware that there are various macroeco-

nomic development factors that determine the carbon emission in a

nation that makes the decision to reduce carbon emission a complex

task. There are studies examining the different aspects of the CO

2

Received: 27 February 2019 Accepted: 31 March 2019

DOI: 10.1002/pa.1953

J Public Affairs. 2019;19:e1953.

https://doi.org/10.1002/pa.1953

© 2019 John Wiley & Sons, Ltd.

wileyonlinelibrary.com/journal/pa 1of10