The impact of financial development, income, energy consumption trade openness on carbon emissions in Jordan

Abstract

This thesis aims to study the effect of financial development, income, energy consumption, and trade openness on carbon emissions in Jordan during the period 1980 to 2011. The importance of analyzing the effect of these factors on CO2 (carbon dioxide) emissions, also known as “greenhouse gases emissions”, stems from the underlying danger of these emissions. Recently, the negative effects of these emissions on climate change have become a hot topic around the world. More alarmingly, the United Nations Environment Program (UNEP, 2014) has announced that global temperature has increased by two degrees Celsius, these changes might be irreversible. In order to reduce the effects of these emissions, they must be controlled to create a balance by the middle or the end of this century. This study attempts to identify some factors affecting the CO2 emissions, and the degree of the influence of each factor. This would help in identifying the maximum amount of carbon dioxide that can be emitted into the atmosphere, but in the accepted limits of temperature rise beyond 2020. Jordan was one of the first countries that took actions regarding the subject of the impact of carbon emissions. Jordan signed the climate change agreement in 1992, and ratified the Kyoto Protocol in 1997. Jordan’s second report on the climate change for 2000 mentioned that the total greenhouse gas emissions are equivalent to 20 million tons of carbon dioxide. The energy sector, which accounted to about 27% of these emissions, takes lead. It is closely followed by the transport sector which accounted to about 20%. The third most influential sector is the waste sector which accounted for about 13% of the emissions. Tracking the timeline of GDP shows CO2 emissions have taken an upward trend during the period of 1980-2011, except for the period between 1988 and 1991 where GDP level declined as a result of the economic crisis to the Jordanian economy which was a result of the deterioration of exchange rate during that period. This study empirically examines the long-run and short-run dynamic relationship between financial development, income, energy consumption, trade openness and carbon emissions. The study tests the existence and direction of a causal relationship between these variables using time series data were obtained from World Bank and UNCTAD databases. Finally, the study considers the validity of EKC (Environmental Kuznets Curves) hypothesis in Jordan for the period 1980–2011. The results of the bound F‐test for co-integration test supports the existence of a long-run relationship between per capita energy consumption, per capita income, the square of per capita income, trade openness, financial development and per capita carbon emissions. Findings also indicate that a per capita carbon emission have a positive relationship with foreign trade to GDP ratio and with energy consumption, while financial development, has a negative and significant impact on per capita carbon emissions in the long- run. The results also support the validity of EKC hypothesis in Jordan’s economy, which means that the level of CO2 emissions in Jordan increases with income during the initial stage, continues until a stabilization point, and then emissions start declining. Moreover, using error-correction depending on the Granger causality test, the study finds a causal relationship between the variables. In particularly, their exists a unidirectional long-run causality from per capita GDP, the square of per capita GDP, per capita energy use and financial development to per capita carbon emissions.