Financial Development, CO2 Emissions, Fossil Fuel Consumption and Economic Growth: The Case of Turkey

Abstract

Many past studies have explored the relationships between income and CO₂ emissions; however, most have not covered the possible effects of financial indicators on their frameworks. This study investigates the relationships between financial development and environmental degradation in Turkey from 1960 to 2011 using a multivariate framework that focuses on economic growth and fuel consumption as additional determinants of environmental degradation. Because a unit root test indicated that data were not stationary, the Johansen co-integration test was applied, revealing that the variables under investigation are co-integrated in the long run. After establishing the long-run relationship between variables, error correction modeling identified the long-run and short-run coefficients of the variables. The findings show that in the long-run, economic growth has negative and significant effect on carbon emissions (-0.069) while fuel consumption has positive and elastic impact on carbon emissions (2.82). Therefore, the error correction term implies that CO₂ moves to its long-run equilibrium level at a speed of adjustment of 16.97% by the contributions of gross domestic product (GDP), fossil fuel consumption and financial development.