The Relationship between CO2 Emissions, Industry, Services and Gross Fixed Capital Formation in the Balkan Countries

Abstract

The examination of the economy-environment nexus is one of the focal issues in the field of environmental economics. This study examines the causal relationships between carbon dioxide (CO2) emissions, industry, services, and gross fixed capital formation for a panel of Balkan countries over the period 1996-2017. A three-step methodological approach is used, including panel unit root tests, panel cointegration tests, and panel causality tests. The results suggest a strong cointegration between the variables, meaning that all variables have a long-run relationship with CO2 emissions. The results of the panel causality show that there is a short-run bidirectional panel causality running between industry and services, and gross fixed capital formation and services. Moreover, there is a unidirectional causality running from industry and gross fixed capital formation to CO2 emissions, and from industry to gross fixed capital formation. The results of the long-run causal relationships show that estimated coefficients of the error correction terms (ECT) in the case of CO2 emissions, industry and gross fixed capital formation are statistically significant, indicating that these three variables are an important part in the adjustment process as the model diverges from the long-run equilibrium. Balkan countries need to further invest in the modernisation of their technological process, as well as to act following the global policy incentives. Environmental taxes, carbon capture and storage, taking part in emission trading schemes and orientation towards renewable energy sources, should further strengthen Balkan countries in achieving environmentally sound economic growth.