Analyzing the Moderating Role of Industrialization on the Environmental Kuznets Curve (EKC) in Indonesia: What Are the Contributions of Financial Development, Energy Consumption, and Economic Growth?

Abstract

The issue of global warming has become increasingly documented as a major problem facing the world. The present study adopted the autoregressive distributed lag (ARDL) model to check the validity of the EKC hypothesis under the moderating role of industrialization on CO2 emissions, and to assess the relationship between CO2 emissions, energy consumption, industrialization, economic growth, and financial development in Indonesia in the long and short term, in three separate models employing data spanning the period 1983–2018. The results of the bounds approach prove the presence of a cointegration relationship between CO2 emissions, economic growth, economic growth square, energy consumption, industrialization, and financial development. In Model 1, the empirical outcomes demonstrate that a rise in economic growth leads to higher CO2 emissions. On the contrary, a rise in economic growth squared impedes CO2 emissions in the long run. This result proves the validity of the environmental Kuznets curve hypothesis. Moreover, Model 2 reveals that economic growth and energy consumption foster higher CO2 emissions. Higher financial development decreases the associated CO2. Model 3 shows that industrialization as a moderator factor shows a reverse consequence of economic growth and economic growth squared on CO2. Economic growth shows a significant negative impact on CO2, while economic growth squared is linked positively with CO2 emissions, which does not validate the EKC hypothesis under the moderating role of industrialization. This study recommends that industries’ transition from reliance on excessive non-renewable energy sources to knowledge-based industrialization will reduce CO2 emissions and improve environmental quality.