Forecasting carbon emission and industrial production using VECM: The case of Bangladesh

It is widely argued that industrial production contributes to the global greenhouse gas emissions, particularly carbon dioxide (CO2) emissions in any countries whether industrialized or developing. This is mainly due to the industrial processes that combine scarce resources to produce tangible goods and intangible services. The industrial processes emit large amounts of CO2 because of the two reasons. First, many manufacturing facilities directly use fossil fuels to create heat and steam needed at various stages of production. Second, energy intensive activities at the manufacturing facilities use more electricity than any other sector so the energy that they use is responsible for vast amounts of CO2 emissions. Therefore, the per capita emissions in the industrialized countries are typically as much as ten times the average in the developing countries. Apparently, vast industrial activities are primarily thought to be responsible for such carbon emissions. There have been conducted a considerable number of studies forecasting industrial production and carbon emissions for the industrialized countries but no studies have thus far looked into this issue for the developing countries, most of which are primarily agriculture dependent. This study is thus an effort to forecast and analyze the causality and long run association between CO2 emissions and industrial production using Vector Error Correction Model (VECM). Other econometric techniques, such as unit root test and Granger causality test have also been used to achieve the objective in a comprehensive and convincing way. The empirical results reveal for Bangladesh that there is no Granger causality between industrial production and CO2 emission in any direction. The results from VECM reveal for Bangladesh that any disequilibrium between CO2 emission and industrial production could take approximately 54 years to converge to the long-run equilibrium. But the adjustment rate for the country’s industrial production is positive, as it should be, as well as relatively faster at the rate of 83 percent a year. So any disequilibrium will be corrected mostly by the adjustment in the country’s industrial production. The study concludes that the current CO2 emissions in Bangladesh are below the equilibrium level, which is an advantageous situation for the country. Therefore, it is expected that the Bangladesh’s industrial sector will not face stricter CO2 emission controlling policies and regulations in the near future.