ΔLNY ΔLNK ΔLNL ΔLNE ΔLNT ECT
5. Conclusion and policy implications
There is an extensive literature looking at the production function (relationship between output, capital, labor, energy consumption and trade) and a separate even more extensive literature looking at the environmental function (relationship between CO2 emissions, income, energy consumption and trade). There is, however, no published papers that bring these two separate streams of economic literature together to investigate the question: Grow output or mitigate CO2 emissions? To attempt these linkages, the purpose of this paper is to parallel the two functions for a panel of nine MENA countries from 1990 to 2009.Short-run and long-run causality results have important implications for production level and environmental policy.
For the production function, capital, labor, energy consumption and trade have a positive and statistically significant impact in short-run on real GDP. Moreover, the error correction term is statistically significant at the 5% level which suggests that the real GDP presents a relative slow speed of adjustment to long-run equilibrium. For FMOLS and DOLS estimates, the mean of the coefficients of capital, labor, energy consumption and trade are respectively 1.18, 0.98, 0.01 and 0.23. The signs of coefficients are similar to the findings of Lean and Smyth (2010a) and Sadorsky (2012).
For the environmental function, income, energy consumption and trade have a positive and statistically significant impact in the short-run on CO2 emissions. Moreover, the error correction term is statistically significant at the 5% level which suggests that CO2 emissions present a relative slow speed of adjustment to long-run equilibrium. For FMOLS and DOLS estimates, the mean of the coefficients of income, squared income, energy consumption and
trade are respectively 0.06, -0.98, 0.92 and 0.03. For two cases, the EKC hypothesis is verified, while the positive sign of trade coefficient indicate that these countries have dirty industries with heavy share of pollutants (Grossman and Krueger, 1995). It means also that an increase in trade openness will increase pollution due to a comparative advantage in dirty production under weaker environmental regulations (Jayanthakumaran et al., 2012).
One general implication is that policies designed to increase energy and trade will also increase output and CO2 emissions. This means that predictions of future energy consumption or trade openness that do not take into account the effect of production level or pollution level will likely under estimate the growth of economies and the pollution of environment. A better environmental approach that takes into account the production function is to facilitate a rise in energy consumption by increasing the share of renewable energy relative to non-renewable energy.
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