Carbon Footprint Management and Economic Growth in Kenya: An Empirical Investigation

ABSTRACT.This paper examines the long-run relationship between carbon dioxide emissions and economic growth in Kenya during the period 1980-2008. The study incorporates energy consumption in the analysis as an intermittent variable - thereby creating a trivariate model. Using the ARDL-Bounds testing approach developed by Pesaran et al. (2001), the study finds that there is a distinct unidirectional causal flow from economic growth to CO2 emissions in Kenya in the short run. However, in the long run there is no causality between CO2 emissions and economic growth in either direction. Other results show that there is a short run unidirectional causal flow from energy consumption to CO2 emissions, a short run bi-directional causality between energy consumption and economic growth, and a long run unidirectional causal flow from economic growth to energy consumption. The empirical findings of this study imply that Kenya can pursue carbon emissions reduction policies without necessarily compromising its long-term growth trajectory.JEL Classification: Q43, C32Keywords: Kenya, CO2 emissions, energy consumption, economic growth(ProQuest: . denotes formulae omitted.)1. IntroductionThe debate regarding the relationship between carbon emissions and economic growth has attracted copious literature in recent years. The thrust of this debate has been whether it is possible for countries to reduce their carbon footprint without necessarily sacrificing their long-term growth path. There exist two views regarding the relationship between carbon emissions and economic growth (Peng and Sun, 2010). The first view maintains that since a decrease in C02 emissions requires a decrease in energy consumption, developed economies have to forego their income growth and developing countries have to restrain their growth ambitions (see Dinda and Coondoo, 2006; Peng and Sun, 2010). The second argument, however, is based on the so-called Environmental Kuznets Curve (EKC). According to the EKC hypothesis, the level of environmental degradation and income per capita resembles an inverted U-shaped curve. Specifically, the hypothesis argues that the level of environmental degradation rises as a country develops, but begins to decrease as the rising incomes pass beyond a turning point. In other words, there is a threshold level of economic growth, beyond which further increase is able to redress the environmental impacts of the early stages of economic development (see also Sun, 1999, Ferda, 2008). Unfortunately, very few studies have examined the causal relationship between carbon emissions and economic growth in sub-Saharan African countries. In fact, the majority of the previous studies on this subject have concentrated mainly on more developed economies. In addition, the majority of the previous studies has mainly applied a bivariate causality test and may, therefore, suffer from the omission-of- variable bias. Other studies have also used a residual-based cointegration test associated with Engle and Granger (1987) and the maximum likelihood cointegration test based on Johansen (1988) and Johansen and Juselius (1990), which may not be appropriate when the sample size is too small (see Nerayan and Smyth, 2005). In an attempt to address these weaknesses, the current study attempts to examine the inter-temporal causal relationship between C02 emissions and economic growth in Kenya - using the newly developed ARDL-Bounds testing approach. Specifically, the study incorporates energy consumption as an intermittent variable in a bivariate setting between C02 emissions and economic growth - thereby creating a simple invariate causality model. The rest of the paper is structured as follows: Section 2 discusses the trends of C02 emissions and economic growth in Kenya. Section 3 presents the literature review, while section 4 deals with the empirical model specification, estimation technique and the empirical analysis of the regression results. …