Determinants of carbon emissions in a European emerging country: evidence from ARDL cointegration and Granger causality analysis

Hungary is one of the European Union's most dynamically developing countries in Central-Eastern Europe with a high income and increasing level of environmental degradation. The present study explores the dynamic relationship between economic growth, electricity consumption, carbon emissions and urbanization in Hungary for period 1974-2014 based on annual data. Using autoregressive distributed lag model, we found long-run relationship among the variables in the presence of structural breaks and Toda-Yamamoto procedure were applied to test causality. The findings indicate that electricity consumption is positively linked with carbon emissions in the long run, which implies that the energy efficiency should be improved. Urbanization has also positive effect on carbon emissions meaning that the number of cities increases the emissions. Causality results suggest that Hungary is growing at the cost of the environment and the lack of the coordination of economic and environmental objectives to fulfill emission reduction targets can reduce economic growth. The reconsideration of the economic and energy policy is vital for ensuring sustainable development and stricter environmental policy is suggested. These results contribute not only to the expansion of the existing literature, but also improves the methodological background by employing a new variable to capture urbanization effect on carbon emissions.