CO2 Emissions-Economic Growth Relationship Revisited: New Insights from the Time-Varying Cointegration Approach

One of the most discussed topics of Environmental economics is the choice of the appropriate functional form to examine the income-environmental impact relationship. Since the developing economies encounter different development stages, the use of relevant specification and technique gains special importance to reveal the country specific relationship. Considering the afore-mentioned points, this study employs the time-varying cointegration approach to investigate the CO2 emissions-economic growth relationship in the case of developing country, Azerbaijan. Time-varying cointegration approach a) takes into account the varying nature of elasticity of emissions and b) does not require the functional specification to be a polynomial. The results document a long-run relationship between carbon emissions and income. The study also concludes that the EKC hypothesis does not hold in Azerbaijan. The positive and time-varying income elasticity of carbon emissions, slightly decreasing at the end of the time period, can be seen as an indication that the country has implemented a number of successful emission/pollution regulatory measures.