Trivariate causality between economic growth, energy consumption, and carbon emissions: empirical evidence from India

Knowledge of causal influences and the direction of causality that exist between system variables are very important for successful policy design and implementation. This research explores the trivariate causality between economic growth, energy consumption (crude oil), and carbon emissions in India in a multivariate framework with a generalized method of moments (GMM) estimation. The ridge regression estimation is utilized to check the robustness of the GMM model. The GMM results show unidirectional causality from capital stock to economic growth, disposable income to energy consumption, and urbanization to carbon emissions. The study reveals bidirectional causality between economic growth and energy consumption, economic growth and carbon emissions, and energy consumption and carbon emissions. The causality from energy consumption to economic growth and from energy consumption to emissions proves to be a trade-off, as any energy conservation policy toward mitigating emissions can frustrate the economic growth of the country. The feedback causality between economic growth and carbon emissions will result in a negative externality on future investments for having a cleaner environment leading to further slowing down of economic growth. A 1% increase in GDP increases carbon emissions by 1.773%, while a 1% increase in disposable income increases energy consumption by 0.065%. Moreover, a 1% increase in urbanization increases carbon emissions by 0.524%. The counterintuitive feedback causation from carbon emissions (1% increase) to energy consumption (0.950% increase) confirms the existence of a “direct rebound effect.” The study also found empirical evidence for the existence of the Environmental Kuznets curve in the Indian context. Finally, some useful policy implications are discussed.