The Relationship Between Economic Growth, Energy Consumption, and CO₂ Emissions

Abstract

Iran’s economic growth over the last decades has been accompanied by many structural shocks and volatilities, which affect other related variables such as energy consumption and CO₂ emissions. Therefore, this study analyzes the relationship between economic growth, energy consumption (including oil, gas, coal, renewable, and electricity), and CO₂ emissions. The important differences of our study are in examining the dynamic relationship among variables concerning volatilities and structural shocks, because of that the TVP-VAR method applied to this aim during 1978–2015. This method helps us to understand the kind of relationship, response of variables to each other’s volatilities and structural shocks, and also the size of response, which is necessary in making accurate policies. Also, stationary, co-integration and causality test used, and then the response and the size of responses to structural shocks and fluctuations of variables are analyzed with TVP-VAR model. The results indicate that there is a bidirectional relationship between energy consumption and GDP, and directional relationships between energy consumption and CO₂, also GDP and CO₂. The results TVP-VAR model shows that the dynamic Kuznets’ theory exists, and the size of the response of energy consumption and CO₂ emissions to GDP changes has been lager than other statues. So policymakers must reduce the energy consumption and CO₂ emissions reactions by replacing renewable energies, which can help to reduce the dependency of sectors to fossil energies and GDP as well as CO₂ reduction.