Structural Change, Financial Development, and Carbon Dioxide Emissions: Does Evidence Support EKC for Sub-Sahara Africa?

T. Onanuga, Olaronke; T. Onanuga, Abayomi; M. Oshinloye, Olufemi; Osobase, Anthony; A. Odusanya, Ibrahim

doi:10.22059/ier.2021.84141

Structural Change, Financial Development, and Carbon Dioxide Emissions: Does Evidence Support EKC for Sub-Sahara Africa?

Authors

Olaronke T. Onanuga ¹

Abayomi T. Onanuga ²

Olufemi M. Oshinloye ³

Anthony Osobase ²

Ibrahim A. Odusanya ⁴

¹ Department of Economics, KolaDaisi University, Ibadan, Nigeria; Center for Economic Policy and Development Research (CEPDeR), Covenant University, Canaanland, Ota, Ogun State, Nigeria

² Department of Economics, Olabisi Onabanjo University, Ago-Iwoye, Ogun State, Nigeria

³ Department of Banking and Finance, Olabisi Onabanjo University, Ago-Iwoye, Ogun State, Nigeria

⁴ Department of Economics, University of Lagos, Akoka, Lagos State, Nigeria

10.22059/ier.2021.84141

Abstract

There are clear signs of climate change in Africa, on the contrary, the continent has limited economic and financial muscle to generate clean, low-carbon, greener, and energy-efficient production activities needed to improve environmental quality. Hence, this paper examines the impact of structural change and financial development on carbon dioxide emissions and tests whether the EKC hypothesis is supported for 31 sampled Sub-Saharan African countries between 1990 and 2017. The study utilizes the pooled mean group heterogeneous panel data. The study finds that the EKC exists for all income groups. The deterministic role of financial development is observed for low and lower-middle-income countries, while the influential role of financial development was obtained for upper-middle and high-income countries. Structural change, industrialization, and agriculture increase the level of CO₂in upper-middle and high, lower-middle, and low-income countries, respectively. To minimize climate change in Africa, there is a need to invest in energy-efficient industrialization and agricultural practices, which could be achieved through targeted financial support.

Keywords

Structural Change

Financial Development

Carbon Dioxide Emissions

Sub-Saharan Africa

Income Group

AfDB (African Development Bank). (2012). Facilitating Green Growth in Africa: Perspectives from the AfDB. Retrieved from https://www.afdb.org/en

Alege, P. O., & Ogundipe, A. A. (2013). Environmental Quality and Economic Growth in Nigeria: A Fractional Cointegration Analysis. International Journal of Development and Sustainability, 2(2), 1-17.

Al-Mulali, U., Chong, W. W., Low, S. T., & Mohammed, A. H. (2015). Investigating the Environmental Kuznets Curve (EKC) Hypothesis by Utilizing the Ecological Footprint as an Indicator of Environmental Degradation. Ecological Indicators, 48, 315-323.

Al Sayed, A. R. M., & Sek, S. K. (2013). Environmental Kuznets Curve: Evidence from Developed and Developing Economies. Applied Mathematical Science, 7(22), 1081-1092.

Andreoni, J., & Levinson, A. (2001). The Simple Analytics of the Environmental Kuznets Curve. Journal of Public Economics, 80, 269-286.

Baek, J. (2016). A New Look at FDI-income-energy-environment Nexus: Dynamic Panel Data Analysis of ASEAN. Energy Policy, 91, 22-27.

Bartlett, B. (1994). The High Cost of Turning Green. Wall Street Journal, Retrieved from https://www.academia.edu/download/31311552/High_Cost_of_Turning_Green.pdf

Beckerman, W. (1992). Economic Growth and the Environment: whose Growth Whose Environment? World Development, 20(4), 481-496.

Begun, J., & Eicher, T. S. (2008). In Search of an Environmental Kuznets Curve in Sulphur Dioxide Concentrations: A Bayesian Model Averaging Approach. Environment and Development Economics, 13(6), 795-822.

Boden, T. A., Marland, G., & Andres, R. J. (2017). Global, Regional, and National Fossil-Fuel CO₂ Carbon Dioxide Information Analysis Center, Retrieved from https://www.osti.gov/biblio/1389331

Carvalho, T. S., & Almeida, E. (2010). The Hypothesis of the Global Environmental Kuznets Curve: An Econometric Spatial Perspective. Estudos Econômicos, 40(3), 587-615.

Casey, G., & Galor, O. (2017). Is Faster Economic Growth Compatible with Reductions in Carbon Emissions? The Role of Diminished Population Growth. Environmental Research Letters, 12, 1-8.

Charfeddine, L., & Khediri, K. B. (2016). Financial Development and Environmental Quality in UAE: Cointegration with Structural Breaks. Renewable and Sustainable Energy Reviews, 55, 1322-1335.

Claessens, S., & Feijen, E. (2007). Financial Sector Development and the Millennium Development Goals. World Bank, Working Paper, 89, Retrieved from https://openknowledge.worldbank.org/handle/10986/7145

Cole, M. A., & Neumayer, E. (2004). Examining the Impact of Demographic Factors on Air Pollution. Population and Environmental, 26, 5-21.

Daly, H. (1991). Steady-state Economics. Washington, DC: Island Press.

Dasgupta, S., Laplante, B., & Mamingi, N. (1998). Capital Market Responses to Environmental Performance in Developing Countries. Washington, DC: The World Bank Development Research Group.

Dasgupta, S., Laplante, B., Wang, H., & Wheeler, D. (2002). Confronting the Environmental Kuznets Curve. Journal of Economic Perspectives, 16(1), 147-168.

De Groot, H. L. F. (2003). Structural Change, Economic Growth and the Environmental Kuznets Curve: A Theoretical Perspective. OCFEB Research Memorandum, 9911, Retrieved from http://hdl.handle.net/1765/837

Dietz, T., & Rosa, E.A. (1997). Effects of Population and Affluence on CO₂ Proceedings of the National Academy of Sciences, 94, 175-179.

Estrada, G., Park, D., & Ramayandi, A. (2015). Financial Development, Financial Openness, and Economic Growth. ADB Economic Working Papers Series, 442, Retrieved from http://hdl.handle.net/11540/5104

Frankel, J., & Romer, D. (1999). Does Trade Cause Growth? The American Economic Review, 89(3), 379–399.

GEO4 (Global Environment Outlook 4). (2007). Environment for Development. Retrieved from UNEP, Malta.

Goodland, R., & Anhang, J. (2009). Livestock and Climate Change: What if the Key Actors in Climate Change are Cows, Pigs, and Chickens? Retrieved from www.worldwatch.org

Grossman, G., & Krueger, A. (1995). Economic Growth and the Environment. Quarterly Journal of Economics, 110, 353–377.

Grunewald, N., & Martinez-Zarzoso, I. (2011). How Well Did the Kyoto Protocol Work? A Dynamic-GMM Approach with External Instruments. Ibero-American Institute for Economic Research, Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2013086

He, J., & Richard, P. (2010). Environmental Kuznets Curve for CO₂ in Canada. Ecological Economics, 69, 1083-1093.

Hoffmann, U. (2011). Some Reflections on Climate Change, Green Growth Illusions and Development Space. United Nations Conference on Trade and Development (UNCTAD), Discussion Paper, 205, Retrieved from https://unctad.org/system/files/official-document/osgdp20115_en.pdf

IPCC (Intergovernmental Panel on Climate Change). (2007). Climate Change 2007: Synthesis Report. Retrieved from https://www.ipcc.ch/report/ar4/syr/

Javid, M., & Sharif, F. (2016). Environmental Kuznets Curve and Financial Development in Pakistan. Renewable and Sustainable Energy Reviews, 54, 406-414.

Jensen, V. (1996). The Pollution Haven Hypothesis and the Industrial Flight Hypothesis: Some Perspectives on Theory and Empirics. Center for Development and the Environment, University of Oslo, Working Paper, 1996.5, Retrieved from https://www.worldcat.org

Kriström, B., & Riera, P. (1996). Is the Income Elasticity of Environmental Improvements less than One? Environmental and Resource Economics, 7(1), 45-55.

Lanoie, P., Laplante, B., & Roy, M. (1998). Can Capital Markets Create Incentives for Pollution Control? Ecological Economics, 26(1), 31-41.

Marsiglio, S., Ansuategi, A., & Gallastegui, M. C. (2016). The Environmental Kuznets Curve and the Structural Change Hypothesis. Environmental and Resource Economics, 63(2), 265-288.

Mensah, J. T. (2014). Carbon Emissions, Energy Consumption and Output: A Threshold Analysis on the Causal Dynamics in Emerging African Economies. Energy Policy, 70, 172-182.

Moomaw, W. R., & Unruh, G. C. (1997). Are Environmental Kuznets Curves Misleading Us? The Case of CO₂ Environment and Development Economics, 2(4), 451-463.

Mitić, P., Ivanović, O. M., & Zdravković, A. (2017). A Cointegration Analysis of Real GDP and CO₂ Emissions in Transitional Countries. Sustainability, 9, 1-18.

Muftau, O., Iyoboyi M., & Ademola A. S. (2014). An Empirical Analysis of the Relationship between CO₂ Emissions and Economic Growth in West Africa. American Journal of Economics, 4(1), 1-17.

Muggah, R., & Kilculien D. (2016). These are Africa’s Fastest-Growing Cities– and They’ll Make or Break the Continent. World Economic Forum on Africa, Retrieved from https://www.weforum.org/agenda/2016/05/africa-biggest-cities-fragility/

Neumayer, E. (2004). National Carbon Dioxide Emissions: Geography Matters. Area, 36(1), 33-40.

---------- (1998). Is Economic Growth the Environment’s Best Friend? Zeitschrift für Umweltpolitik & Umweltrecht, 21(2), 161-176.

Ojewumi, J. S. (2015). Environmental Kuznets Curve Hypothesis in Sub-Saharan African Countries – Evidence from Panel Data Analysis. International Journal of Environment and Pollution Research, 3(1), 20-33.

Onafowora, O. A., & Owoye, O. (2013). Carbon Emissions and Income Trajectory in Eight Heterogeneous Countries: the Role of Trade Openness, Energy Consumption, and Population Dynamics. Journal of Global Economy, 9(2), 85-122.

Onanuga, O. T. (2017). Elasticity of CO₂ Emissions with Respect to Income, Population, and Energy Use: Time Series Evidence from African Countries. Economic Alternatives, 4, 651-670.

Onanuga, O. T., & Onanuga, A. T. (2016). The Response of Banking Sector Development to Financial and Trade Openness in the Presence of Global Financial Crisis in Africa. Botswana Journal of Economics, 1, 80-103.

Ozatac, N., Gokmenoglu, K. K., & Taspinar, N. (2017). Testing the EKC Hypothesis by Considering Trade Openness, Urbanisation, and Financial Development: the Case of Turkey. Environmental Science and Pollution Research, Retrieved from https://link.springer.com/article/10.1007/s11356-017-9317-6

Panayotou, T. (2003). Economic Growth and the Environment. Spring Seminar of the United Nations Economic Commission for Europe, Geneva, and Economic Survey of Europe, Retrieved from https://unece.org/fileadmin/DAM/ead/sem/sem2003/papers/panayotou.pdf

---------- (2000). Economic Growth and the Environment. Center for International Development (CID), Working Paper, 56, Retrieved from https://www.hks.harvard.edu

---------- (1997). Demystifying the Environmental Kuznets Curve: Turning a Black Box into a Policy Toll. Environment and Development Economics, 2(4), 465-484.

Pandelis, M. (2012). Is there an Environmental Kuznets Curve in the Carbon Dioxide Emissions? University of Cyprus, Discussion Paper, 16-2012, Retrieved from https://ideas.repec.org/p/ucy/cypeua/16-2012.html

Pesaran, M. H., & Smith, R. P. (1995). Estimating Long-run Relationships from Dynamic Heterogeneous Panels. Journal of Econometrics, 68(2), 79-113.

Pesaran, M. H., Shin Y., & Smith, R. P. (1999). Pooled Mean Group Estimation of Dynamic Heterogeneous Panels. Journal of the American Statistical Association, 94, 621-634.

Piaggio, M., & Padilla, E. (2012). CO₂ Emissions and Economic Activity: Heterogeneity across Countries and Non-stationary Series. Energy Policy, 46, 370-381.

Salahuddin, M., Gow, J., & Ozturk, I. (2015). Is the Long-run Relationship between Economic Growth, Electricity Consumption and Carbon Dioxide Emissions and Financial Development in Gulf Cooperation Council Countries Robust? Renewable and Sustainable Energy Reviews, 51, 317-326.

Selden, T. M., & Song, D. (1994). Environmental Quality and Development: is there a Kuznets Curve for Air Pollution Emission? Journal of Environmental Economics and Management, 27, 147–162.

Shafik, N., & Bandyopadhyay, S. (1992). Economic Growth and Environmental Quality - Time Series and Cross-country Evidence. World Development Report (WDR), Working Paper, 904, Retrieved from http://documents.worldbank.org/curated/en/833431468739515725/Economic-growth-and-environmental-quality-time-series-and-cross-country-evidence

Shahbaz, M. (2013). Does Financial Instability Increase Environmental Pollution in Pakistan? Economic Modelling, 33, 537-544.

Stern, D. I. (2004). The Rise and Fall of the Environmental Kuznets Curve. World Development, 32(8), 1419-1439.

Tamazian, A., Piñeiro, J. C., & Vadlamannati, K. C. (2009). Does Higher Economic and Financial Development Lead to Environmental Degradation: Evidence from BRIC Countries? Energy Policy, 37, 246-253.

Tamazian, A., & Rao, B. B. (2010). Do Economic, Financial, and Institutional Developments Matter for Environmental degradation? Evidence from Transitional Economies. Energy Economics, 32(1), 137-145.

UNCTAD (United Nations Conference on Trade and Development). (2012). Economic Development in Africa: Structural Transformation and Sustainable Development in Africa. Retrieved from https://unctad.org/system/files/official-document/aldcafrica2012_embargo_en.pdf

WDR (World Development Report). (1992). Development and the Environment. Oxford: Oxford University Press.

World Bank. (2000). Is Globalisation Causing a ‘Race to the Bottom’ in Environmental Standard? Washington, DC: World Bank.

Yassin, J., & Aralas, S. B. (2017). The Impact of Structural Transformation on Environmental Pollution: Evidence from Asian Countries. Proceedings of International Conference on Economics (ICE), Retrieved from https://www.researchgate.net/