Closing the evidence gap: Energy consumption, real output and pollutant emissions in a developing mountainous economy

Abstract

This study examines the inter relationships between energy consumption, output and carbon emissions in a mountainous economy using an augmented Vector Autoregression model. Time-series data over the period 1975-2013 is studied applying a multivariate framework using population and gross fixed capital formation as additional variables for Nepal. We control for the presence of structural breaks, autoregressive conditional heterosdeacticity and serial correlation in our analysis. Testing for Granger causality between integrated variables based on asymptotic theory reveals a long-run unidirectional Granger causality running from GDP to energy consumption, and a unidirectional Granger causality running from carbon emissions to GDP. The results indicate that energy consumption does not lead to economic growth while income leads to energy consumption. We suggest that the government of Nepal can adopt energy conservation policies and energy efficiency improvements to narrow the energy supply-demand gap. However, environmental policies aimed at reducing air pollution may have adverse effects on the growth of the Nepalese economy, which calls for a gradual approach towards decarbonisation. Our results remain robust to different estimators and contributes to an emerging literature on the nexus relationships between energy consumption, income and carbon emissions in developing economies.