What drives carbon-dioxide emissions: income or electricity generation? evidence from Saudi Arabia

This study investigates the Granger causality relationship among income, electricity generation, and carbon-dioxide (CO₂) emissions in Saudi Arabia. It is motivated by the heightened world concern over global pollution and climate change. There have been many attempts to explain the increase in per-capita CO₂ emissions by relating it to per-capita income growth in a country via the “Environmental Kuznets Curve.” However, the previous research on CO₂ emissions did not take electricity generation into account. Our multivariate study is based on a rigorous time-series technique known as long-run structural modeling and investigates two questions: (1) whether real income, electricity generation, and CO₂ emissions are cointegrated or not and (2) if they are cointegrated, this study makes an initial attempt to discern the Granger-causality relationship between them. In particular, we ask what drives CO₂ emissions: income or electricity generation? Saudi Arabia is taken as a case study. Our econometric findings tend to indicate that real income, electricity generation, and CO₂ emissions are cointegrated and that CO₂ emissions are driven mainly by real income, although it appears that at the out-of-sample forecast period electricity generation also started playing a significant role in explaining CO₂ emissions. This study’s findings have significant policy implication since CO₂ emissions are largely income-driven, suggesting that policies should be focused on environment-friendly gross domestic product (GDP) growth. Moreover, not only the production but also the consumption of GDP, in particular the tastes and preferences of high-income individuals, needs to be environment-friendly. These findings have profound policy implications for both the developing and the developed economies of the world.