The economy-energy-environment Nexus in IMF’s Top 2 biggest economies: a TY approach


This paper assesses the relationship between carbon emissions, economic growth and, energy consumption, in USA and China from the perspective of Granger causality, in a multivariate framework controlling for financial development, urbanization, and trade openness. Econometric techniques employed include unit root tests, Toda and Yamamoto Granger causality, and generalized impulse response and variance decomposition analysis for the time horizon 1980–2017. Test results indicate that governments of the USA and China cannot implement sturdier strategic energy policies in the long run without inhibiting the growth of the economy because of the bidirectional causative linkage between economic growth and energy use. A causal link does not exist between carbon emissions and financial development for both countries. Nevertheless, in the USA, there exists a unidirectional Granger causality controlling from energy consumption to financial development. In both economies, urbanization Granger causes CO2 emissions and energy use but the reverse does not hold. An upsurge in energy consumption and carbon emissions will lead to a surge in trade openness but not vice versa for China. A noteworthy result is that there is a substantiation of unidirectional causality from energy consumption to carbon emissions in both countries. In the USA, impulse response and variance decomposition analysis disclosed the effect of financial development is projected to have diminutive magnitude whiles in the future, energy use, economic growth, trade openness, and urbanization would influence carbon emissions significantly. The impacts of trade openness and financial development are expected to be of little importance in China. The general findings implied that urbanization, economic growth, and energy consumption influenced CO2 emissions significantly in the USA and China. Understanding these similar and contrasting situations is essential to reaching a global agreement on climate change affecting IMF’s top 2 biggest economies.

First published online 07 November 2019

Keyword : sustainable growth, energy-environment nexus, financial development, urbanization, trade, USA, China

How to Cite
Atta Mills, E. F. E., Zeng, K., & Baafi, M. A. (2020). The economy-energy-environment Nexus in IMF’s Top 2 biggest economies: a TY approach. Journal of Business Economics and Management, 21(1), 1-22.
Published in Issue
Jan 14, 2020
Abstract Views
PDF Downloads
Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.


Appiah, M. O. (2018). Investigating the multivariate Granger causality between energy consumption, economic growth and CO2 emissions in Ghana. Energy Policy, 112, 198-208.

Arouri, M. E. H., Ben Youssef, A., M’henni, H., & Rault, C. (2012). Energy consumption, economic growth and CO2 emissions in Middle East and North African countries. Energy Policy, 45, 342-349.

Apergis, N., & Ozturk, I. (2015). Testing environmental Kuznets curve hypothesis in Asian countries. Ecological Indicators, 52, 16-22.

Barnes, D. F., Krutilla, K., & Hyde, W. F. (2005). The urban household energy transition: social and environmental impacts in the developing world. Resources for the Future. Washington, DC.

Bhattacharya, M., Paramati, S. R., Ozturk, I., & Bhattacharya, S. (2016). The effect of renewable energy consumption on economic growth: Evidence from top 38 countries. Applied Energy, 162, 733-741.

Bekhet, H. A., Matar, A., & Yasmin, T. (2017). CO2 emissions, energy consumption, economic growth, and financial development in GCC countries: Dynamic simultaneous equation models. Renewable and Sustainable Energy Reviews, 70, 117-132.

Dogan, E., & Turkekul, B. (2016). CO2 emissions, real output, energy consumption, trade, urbanization and financial development: testing the EKC hypothesis for the USA. Environmental Science and Pollution Research, 23(2), 1203-1213.

Esso, L. J., & Keho, Y. (2016). Energy consumption, economic growth and carbon emissions: Cointegration and causality evidence from selected African countries. Energy, 114, 492-497.

Farhani, S., Mrizak, S., Chaibi, A., & Rault, C. (2014). The environmental Kuznets curve and sustainability: A panel data analysis. Energy Policy, 71, 189-198.

Gurgul, H., & Lach, Ł. (2011). The role of coal consumption in the economic growth of the Polish economy in transition. Energy Policy, 39, 2088-2099.

Jalil, A., & Feridun, M. (2011). The impact of growth, energy and financial development on the environment in China: A cointegration analysis. Energy Economics, 33, 284-291.

Kasman, A., & Duman, Y. S. (2015). CO2 emissions, economic growth, energy consumption, trade and urbanization in new EU member and candidate countries: A panel data analysis. Economic Modelling, 44, 97-103.

Koop, G., Pesaran, M. H., & Potter S. M. (1996). Impulse response analysis in nonlinear multivariate models. Journal of Econometrics, 74, 119-147.

Kraft, J., & Kraft, A. (1978). On the relationship between energy and GNP. Journal of Energy and Development, 3(2), 401-403.

Lau, L. S., Choong, C. K., & Ng, C. F. (2018). Role of institutional quality on environmental Kuznets Curve: a comparative study in developed and developing countries, in Advances in Pacific Basin Business, Economics and Finance, 223-247.

Mardani, A., Streimikiene, D., Cavallaro, F., Loganathan, N., & Khoshnoudi, M. (2018). Carbon dioxide (CO2) emissions and economic growth: A systematic review of two decades of research from 1995 to 2017. Science of the Total Environment, 649, 31-49.

Naminse, E. Y., & Zhuang, J. (2018). Economic growth, energy intensity, and carbon dioxide emissions in China. Polish Journal of Environmental Studies, 27(5), 2193-2202.

Perron, P. (2006). The great crash, the oil price shock, and the unit root hypothesis. Econometrica, 57, 1361-1401.

Sadorsky, P. (2010). The impact of financial development on energy consumption in emerging economies. Energy Policy, 38(5), 2528-2535.

Saidi, K., & Hammami, S. (2015). The impact of CO2 emissions and economic growth on energy consumption in 58 countries. Energy Reports, 1, 62-70.

Salahuddin, M., Gow, J., Ali, M. I., Hossain, M. R., Al-Azami, K. S., Akbar, D., & Gedikli, A. (2019). Urbanization-globalization-CO2 emissions nexus revisited: empirical evidence from South Africa. Heliyon, 5(6), e01974.

Shahbaz, M., & Lean, H. H. (2012). Does financial development increase energy consumption? The role of industrialization and urbanization in Tunisia. Energy Policy, 40, 473-479.

Shahbaz, M., Hye, Q. M. A., Tiwari, A. K., & Leitão, N. C. (2013). Economic growth, energy consumption, financial development, international trade and CO2 emissions in Indonesia. Renewable and Sustainable Energy Reviews, 25, 109-121.

Shahbaz, M., & Sinha, A. (2019). Environmental Kuznets curve for CO2 emissions: a literature survey. Journal of Economic Studies, 46(1), 106-168.

Springer, C., Evans, S., Lin, J., & Roland-Holst, D. (2019). Low carbon growth in China: The role of emissions trading in a transitioning economy. Applied Energy, 235, 1118-1125.

Stern, D. I. (2004). The rise and fall of the environmental Kuznets Curve. World Development, 32, 1419-1439.

Taylor, M. S., & Copeland, B. R. (2001). Trade and transboundary pollution. In The Economics of International Trade and the Environment (pp. 125-148). CRC Press.

Temiz Dinç, D., & Akdoğan, E. C. (2019). Renewable energy production, energy consumption and sustainable economic growth in Turkey: A VECM Approach. Sustainability, 11(5), 1273.

Tiba, S., & Omri, A. (2017). Literature survey on the relationships between energy, environment and economic growth. Renewable and Sustainable Energy Reviews, 1129-1146.

Toda, H. Y., & Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 6, 225-250.

Wang, S., Li, Q., Fang, C., & Zhou, C. (2016). The relationship between economic growth, energy consumption, and CO2 emissions: Empirical evidence from China. Science of the Total Environment, 542, 360-371.

Yuan, J. H., Kang, J. G., Zhao, C. H., & Hu, Z. G. (2008). Energy consumption and economic growth: Evidence from China at both aggregated and disaggregated levels. Energy Economics, 30, 3077-3094.

Yuxiang, K., & Chen, Z. (2011). Financial development and environmental performance: Evidence from China. Environment and Development Economics, 16(1), 93-111.

Zhang, X., & Cheng X. (2009). Energy consumption, carbon emissions, and economic growth in China. Ecological Economics, 68(10), 2706-2712.

Zivot, E., & Andrews D. W. K. (1992). Further evidence on the great crash, the oil-price shock, and the unit-root hypothesis. Journal of Business and Economic Statistics, 10, 251-270.