The 2013 assessment report by the Intergovernmental Panel on Climate Change suggests that the largest contribution to total radioactive forcing (RF) in the world came from an increase in the atmospheric concentration of carbon dioxide (CO2) emissions since 1750. CO2 emissions are responsible for the 58.8% of the global greenhouse gasses (GHGs) (The Little Green Data Book 2007, World Bank). Without further effective policies to combat climate change, the OECD (2008) estimates the growth of GHG emissions of about 52% by 2050.
To the extent that energy consumption is the main source of carbon emissions, the essential question for every country is then how to promote economic growth without degrading environmental quality. Prior literature examine the causal interactions between energy consumption, carbon emissions, and overall economic growth for a number of groups of countries across regions, e.g., Pao and Tsai (2010) for BRIC countries; Arouri et al. (2012) for MENA countries; Borhan et al. (2012) for eight Asian countries; Moomaw and Unruh (1997) for 16 developed countries; Piaggio and Padilla (2012) for OECD countries; Coondoo and Dinda (2008) for a handful number of African, Asian, American, and European countries; and Hossain (2011) on newly industrialized countries. However, empirical literature on the sectoral growth effect on carbon emission is limited.
We argue that an exhaustive study on the sectoral growth effect on carbon emission involving the middle-income countries merits investigation for several reasons. First, over the last three decades, the economic significance of middle-income countries is growing in global growth paradigm. In the past three decades, these countries have been enjoying higher economic growth by transforming their economies from the primary agricultural sector to the energy-led industrial sector. Table 1 clearly demonstrates that on average, middle-income countries account for 14.84, 15.95, and 19.56% of the world share of GDP during the decades of 1980–1990, 1990–2000, and 2000–2010, respectively. This is an unprecedented 31.71% increase in growth from 1980 to 2010 in the world share of GDP.
To fuel continued economic growth, today, middle-income countries alone consume about 42% of the world’s energy, indicating a 30% increase during the period of 1990–2010 and emitting 43.38% of the world’s total CO2 emissions, almost a 50% increase during the period of 1990–2010. Today, middle-income countries’ shares of the world GDP, energy use, and CO2 emission are 19.56, 43.01, and 43.39%, respectively, clearly indicating that an exhaustive study on the dynamic linkage of sectoral GDP, energy consumption, and CO2 emission is a serious academic and policy requirement, which earlier studies have overlooked. Furthermore, such investigation becomes even more interesting since almost 70% of the world’s population lives in middle-income countries.
Second, there is a significant structural difference in the economic growth achieved and pursued by countries across the world. World Bank (2010) suggests that, in the post-industrialized period, there is a tremendous growth in service output. The agriculture sector contributes only 2%, while the service sector contributes 66% of a high-income country’s share of GDP. In a disaggregate level, though the economic structure of middle-income countries is still dominated by agriculture—with output constituting 52.37, 56.17, and 59.66% for the decades of 1980–1990, 1990–2000, and 2000–2010, respectively, (see Fig. 1)—there is a stupendous level of growth achieved by middle-income countries in industrial and service sectors. Over the last three decades, the middle-income countries’ share of the world’s industrial output has been 17.16, 20.38, and 27.02%, respectively, indicating an average growth rate of 57.45%, and the middle-income countries’ share of the world’s industrial output has been 11.26, 12.18, and 14.97%, respectively, indicating an average growth rate of 33.01% over the same period. Among the middle-income countries, with respect to the world share of sectoral GDP, the upper middle-income countries enjoy superiority over lower middle-income countries in respect to industrial output, while the lower middle-income countries enjoy superiority over upper middle-income countries in respect to service output. These results clearly highlight the fast-changing structural transition of the economies of middle-income countries towards industrialization and the service sector. Therefore, the potential that these sectors are contributing differently to the CO2 emission level cannot be ruled out. However, empirical investigations on the relative contribution of sectoral GDP on CO2 emissions across regions are non-existent in this field. Though a recent study by Al Mamun et al. (2014) have addressed such concerns, their study did not consider the possibility of cross-sectional dependence in both output growth and CO2 emission. Moreover, their study ignored an important variable energy consumption. As mentioned earlier, since the 1990s, the global share of middle-income countries’ output in the agriculture sector has increased by 13.92% while in the industrial and service sectors, such growth has been 57.45 and 32.94%, respectively. Such an unparalleled and tangible economic transformation in middle-income countries might offer a new explanation on the output emission nexus. An empirical validation about the difference in the sector-wise contribution to CO2 emission within a cross-sectional dependence framework will contribute to developing an environmentally harmonious and properly blended pro-growth strategy for middle-income countries.
Third, achieving economic growth is always a political mandate that every government across the world wants to pursue. However, for middle-income countries, such a mandate is more pronounced than in other countries. This is because most middle-income countries are heavily populated (almost 70% of the world’s population lives in middle-income countries), and their governments are relatively more burdened and pressed to increase per capita income, provide employment (youth unemployment rate is 21% (Cho et al. 2012) in middle-income countries), and increase the standard of living for their citizens. What is the consequence of such political mandate? Studies suggest that over next three decades, some three billion people are expected to join a new global middle class, increasing the daily energy consumption. This unprecedented increase in global energy consumption will spur additional CO2 emissions. Studies such as those of Faiers et al. (2007) and Mills and Schleich (2012) suggest that technological sophistication, residential energy-efficient technology adoption, energy conservation, knowledge, and attitude towards energy savings are important steps in minimizing the negative effect of increasing energy use and economic growth. Arguably, middle-income countries lack such technological sophistication and have a weak infrastructure in terms of public awareness, regulations, and technology to promote low carbon and sustainable economic growth compared to high-income countries (Yanikkaya 2003). Therefore, an aggressive low-cost, pro-growth approach by middle-income countries that are not concerned with the environmental consequences of their output growth is an alarming reality. A study on the nature and causes of their shares of CO2 emission in the global atmosphere will enable appropriate policy formulation for the harmonious coexistence between economic growth and ecological balance.
Fourth, sociological research on the climate change science and climate policy has put attention on human dimensions including deforestation, industrial water pollution, ecological consequences (e.g., public health), greenhouse gas emissions, and sustainable development. The environmental sociology (Schnaiberg 1980) theory explains the complexity between the market liberalization and the environment sustainability, while the ecological modernization theory (e.g., Mol 1997) argues that the advanced market societies will improve resource efficiency through social and technological innovations. Previous research conducted by sociologists indicates that the national-level greenhouse gas emissions provides evidence that population size is a primary anthropogenic driver of total carbon emissions (e.g., Rosa et al. 2004; York et al. 2003; Rosa and Dietz 2012) and that globalization increases per capita emissions in lower-income nations (e.g., Jorgenson and Clark 2012). Industrialization and liberalization are two important drivers of global climate change (Rockström et al. 2009). They conclude that the rise of industrialization led to the use of fossil fuels and the power of industrial ignition to the production of commodities for expanding market exchange and capital accumulation (Foster et al. 2010).
Finally, a study on middle-income country’s sample has additional merits as well. It is well known that CO2 emission is a global phenomenon, and there is a vertical and horizontal channel for the atmospheric concentration of CO2 at least in a particular region. Therefore, it is possible that CO2 emissions in one country can affect another country. For example, the Indonesian forest fires in 1997 and 2013 had a severe effect on the emission level of Malaysia as well as Singapore. Thus, most of the earlier empirics to date in this field have serious methodological limitations. The methodological limitations stem not only from the inherent nature of the methodology applied but also from improperly contextualizing the problem addressed. CO2 emissions are a global problem, and a country-specific study cannot fully uncover the dynamic nexus between emissions and output, since in the age of globalization and trade liberalization, most of the today’s middle-income countries including China, India, Brazil, Malaysia, Indonesia, Turkey, and South Africa have adapted an export-oriented pro-growth strategy. A spur of foreign capital by multinational corporations (MNCs), combined with middle-income countries’ resources, is taking global productivity to new heights. The economic power of Indian and China in the global context clearly reaffirms such reality. Today, these middle-income countries are fiercely competing against each another in the international marketplace. Thus, the rise of output growth in these countries is cross-sectionally dependent. Alternatively, CO2 emissions resulted from output growth in one middle-income country can affect the size and intensity of the CO2 emission in another middle-income country.
Hence, quite candidly, a focus on only middle-income countries has the same problem. However, we argue that such problem in the selection of middle-income countries is not as serious since other left-out regions such as high-income countries are relatively far better equipped than middle-income countries to deal with CO2 emissions; at the same time, the low-income countries contribute so insignificantly to the global share of GDP that CO2 emission from their output growth might be ignored. Therefore, acknowledging the idea of cross-sectional dependence in the CO2 emission, the earlier literature focusing on a specific country can be criticized from the wrong contextualization of the CO2 emission nature, and literature focusing on specific regions (see Table 2) can be criticized for ignoring the possible effect of cross-sectional dependence in their estimation.