Corruption, climate and the energy-environment-growth nexus

This paper examines the causal relationships between economic growth, energy consumption and carbon dioxide (CO2) emissions in high-income and upper-middle-income countries using the simultaneous equations framework, with data from 1985 to 2011. By taking institutional quality (measured by the level of corruption) and climate (measured by average temperatures over the winter and summer months) into account, this is the first study to incorporate both of these factors into a simultaneous equations model within the energy-environment-growth nexus. The dependent variables in the system of three simultaneous equations are real gross domestic product (GDP), energy consumption and CO2 emissions as a proxy for air pollution. The results have two important implications. First, they document a bidirectional causal relationship between GDP and energy consumption but do not provide support for the environmental Kuznets curve (EKC) hypothesis. This is revolutionary in the sense that it indicates that high-income and upper-middle-income countries base their economic growth on a feedback relationship with energy consumption and that the ensuing pollution has not yet reached a maximum point, even in these countries. Second, by implying that climate and weather variations are more important determinants of energy consumption and CO2 emissions than corruption, the results suggest that changes in institutional quality are likely to have only a limited impact on energy and environmental policies.