Financial Development, CO2 Emissions, Fossil Fuel Consumption and Economic Growth: The Case of Turkey

  • Korhan K. Gokmenoglu
Keywords: Financial Development, CO2 Emissions, Fossil Fuel Consumption, Economic Growth


Many past studies have explored the relationships between income and CO2 emissions; however, most have not covered the possible effects of financial indicators on their frameworks. This study investigates the relationships between financial development and environmental degradation in Turkey from 1960 to 2011 using a multivariate framework that focuses on economic growth and fuel consumption as additional determinants of environmental degradation. Because a unit root test indicated that data were not stationary, the Johansen co-integration test was applied, revealing that the variables under investigation are cointegrated in the long run. After establishing the long-run relationship between variables, error correction modeling identified the long-run and short-run coefficients of the variables. The findings show that in the long-run, economic growth has negative and significant effect on carbon emissions (-0.069) while fuel consumption has positive and elastic impact on carbon emissions (2.82). Therefore, the error correction term implies that CO2 moves to its long-run equilibrium level at a speed of adjustment of 16.97% by the contributions of gross domestic product (GDP), fossil fuel consumption and financial development.

Author Biography

Korhan K. Gokmenoglu

Dr. Korhan Gokmenoglu is an associate professor in the department of banking and finance of Eastern Mediterranean University. He has attended various universities as a student or scholar including Middle East Technical University (Turkey), Brandeis University (U.S.), ESSEC (France), University of California San Diego (U.S.). His Ph.D. is in the field of macroeconomics. He has published many papers in international journals on energy economics. His fields of interest are environmental degradation, renewable energy, energy policy, and energygrowth nexus. E-mail:


Alkhathlan, K. and Javid, M. (2015, August). Carbon emissions and oil consumption

in Saudi Arabia. Renewable and Sustainable Energy Reviews, 48, pages 105-111.

Chen, P., Chen, S., Hsu, C. and Chen, C. (2016). Modeling the global relationships

among economic growth, energy consumption and CO2 emissions. Renewable and

Sustainable Energy Reviews, 65, pages 420-431.

Kasman, A. and Duman, Y. (2015). CO2 emissions, economic growth, energy consumption,

trade and urbanization in new EU member and candidate countries: a

panel data analysis. Economic Modelling, 44, pages 97-103.

Ozturk, I. and Acaravci, A. (2010). CO2 Emissions, energy consumption and economic

growth in Turkey. Renewable and Sustainable Energy Reviews, 14(9), pages


Esso, L. and Keho, Y. (2016). Energy consumption, economic growth and carbon

emissions: cointegration and causality evidence from selected African countries.

Energy, 114, pages 492-497.

Tiba, S. and Omri, A. (2016). Literature survey on the relationships between energy,

environment and economic growth. Renewable and Sustainable Energy Reviews.

Kraft, J. and Kraft, A. (1978). Relationship between energy and GNP. Journal of

Energy Development (U.S.), 3(2), pages 401-403.

Al-Mulali, U. (2011). Oil consumption, CO2 emission and economic growth in

MENA countries. Energy, 36(10), pages 6,165-6,171.

Belloumi, M. (2009). Energy consumption and GDP in Tunisia: cointegration and

causality analysis. Energy policy, 37(7), pages 2,745-2,753.

Ghosh, S. (2010). Examining carbon emissions economic growth nexus for India:

a multivariate cointegration approach. Energy Policy, 38(6), pages 3,008-3,014.

Fallahi, F. (2011). Causal relationship between energy consumption (EC) and

GDP: a Markov-switching (MS) causality. Energy, 36(7), pages 4,165-4,170.

Narayan, P. and Singh, B. (2007). The electricity consumption and GDP nexus for

the Fiji Islands. Energy Economics, 29(6), pages 1,141-1,150.

Ozturk, I. (2010). A literature survey on energy-growth nexus. Energy Policy, 38(1),

pages 340-349.

Payne, J. (2010). A survey of the electricity consumption-growth literature. Applied Energy, 87(3), pages 723-731.

Halicioglu, F. (2009). An econometric study of CO2 emissions, energy consumption,

income and foreign trade in Turkey. Energy Policy, 37(3), 1,156-1,164.

Hossain, M. (2011). Panel estimation for CO2 emissions, energy consumption,

economic growth, trade openness and urbanization of newly industrialized countries.

Energy Policy, 39(11), pages 6,991-6,999.

Parikh, J. and Shukla, V. (1995). Urbanization, energy use and greenhouse effects

in economic development: results from a cross-national study of developing

countries. Global Environmental Change, 5(2), pages 87-103.

Pao, H., and Tsai, C. (2011). Multivariate Granger causality between CO2 emissions,

energy consumption, FDI (foreign direct investment) and GDP (gross domestic

product): evidence from a panel of BRIC (Brazil, Russian Federation, India,

and China) countries. Energy, 36(1), pages 685-693.

Sadorsky, P. (2010). The impact of financial development on energy consumption

in emerging economies. Energy Policy, 38(5), pages 2,528-2,535.

Zhang, Y. (2011). The impact of financial development on carbon emissions: an

empirical analysis in China. Energy Policy, 39(4), pages 2,197-2,203.

Claessens, S. and Feijen, E. (2007). Financial Sector Development and the Millennium

Development Goals (No. 89). World Bank Publications.

Tamazian, A., Chousa, J. and Vadlamannati, K. (2009). Does higher economic and

financial development lead to environmental degradation: evidence from BRIC

countries. Energy Policy, 37(1), pages 246-253.

Burck, J., Bals, C. and Rossow, V. (2014). The climate change performance index:

results 2014. Germanwatch Nord-Süd Initiative eV.

Ediger, V., Akar, S. and Uğurlu, B. (2006). Forecasting production of fossil fuel

sources in Turkey using a comparative regression and ARIMA model. Energy

Policy, 34(18), pages 3,836-3,846.

Zivot, E. and Andrews, D. (1992). Further evidence on the great crash, the oilprice

shock, and the unit-root. Journal of Business and Economic Statistics, 10(3),

pages 251-270.

Soytas, U. and Sari, R. (2003). Energy consumption and GDP: causality relationship

in G-7 countries and emerging markets. Energy Economics, 25(1), pages 33-37.

Iyke, B. (2015). Electricity consumption and economic growth in Nigeria: a revisit

of the energy-growth debate. Energy Economics, 51, pages 166-176.

Ozturk, I., Aslan, A. and Kalyoncu, H. (2010). Energy consumption and economic

growth relationship: evidence from panel data for low and middle-income countries.

Energy Policy, 38(8), pages 4,422-4,428.

Pao, H. (2009). Forecast of electricity consumption and economic growth in Taiwan

by state space modeling. Energy, 34(11), pages 1,779-1,791.

Yuan, J., Zhao, C., Yu, S. and Hu, Z. (2007). Electricity consumption and economic

growth in China: cointegration and co-feature analysis. Energy Economics, 29(6),

pages 1,179-1,191.

Paul, S. and Bhattacharya, R. (2004). Causality between energy consumption and

economic growth in India: a note on conflicting results. Energy Economics, 26(6),

pages 977-983.

d’Arge, R. (1971). Essay on economic growth and environmental quality. The

Swedish Journal of Economics, 73(1), pages 25-41.

d’Arge, R. and Kogiku, K. (1973). Economic growth and the environment. The

Review of Economic Studies, 40(1), pages 61-77.

Buttel, F. and Flinn, W. (1976). Economic growth versus the environment: survey

evidence. Social Science Quarterly, 57(2), pages 410-420.

Nordhaus, W. (1977). Economic growth and climate: the carbon dioxide problem.

The American Economic Review, 67(1), pages 341-346.

Ang, J. (2007). CO2 emissions, energy consumption, and output in France. Energy

Policy, 35(10), pages 4,772-4,778.

Soytas, U., Sari, R. and Ewing, B. (2007). Energy consumption, income, and carbon

emissions in the United States. Ecological Economics, 62(3), pages 482-489.

Lotfalipour, M., Falahi, M. and Ashena, M. (2010). Economic growth, CO2 emissions,

and fossil fuels consumption in Iran. Energy, 35(12), pages 5,115-5,120.

Li, F., Dong, S., Xue, L., Liang, Q. and Yang, W. (2011). Energy consumptioneconomic

growth relationship and carbon dioxide emissions in China. Energy

Policy, 39(2), pages 568-574.

Saboori, B. and Sulaiman, J. (2013). CO2 emissions, energy consumption and

economic growth in association of Southeast Asian Nations (ASEAN) countries: a

cointegration approach. Energy, 55, 813-822.

Omri, A. (2013). CO2 emissions, energy consumption and economic growth nexus

in MENA countries: evidence from simultaneous equations models. Energy Economics,

, pages 657-664.

Saidi, K. and Hammami, S. (2015). The impact of CO2 emissions and economic

growth on energy consumption in 58 countries. Energy Reports, 1, pages 62-70.

Tang, C. and Tan, B. (2015). The impact of energy consumption, income and foreign

direct investment on carbon dioxide emissions in Vietnam. Energy, 79, pages


Gokmenoglu, K., Ozatac, N. and Eren, B. (2015). Relationship between industrial

production, financial development and carbon emissions: the case of Turkey. Procedia

Economics and Finance, 25, pages 463-470.

Tamazian, A. and Rao, B. (2010). Do economic, financial and institutional developments

matter for environmental degradation? Evidence from transitional

economies. Energy Economics, 32(1), pages 137-145.

Jalil, A. and Feridun, M. (2011). The impact of growth, energy and financial development

on the environment in China: a cointegration analysis. Energy Economics,

(2), pages 284-291.

Shahbaz, M., Tiwari, A. and Nasir, M. (2013). The effects of financial development,

economic growth, coal consumption and trade openness on CO2 emissions in

South Africa. Energy Policy, 61, pages 1,452-1459.

Saboori, B., Sulaiman, J. and Mohd, S. (2012). Economic growth and CO2

emissions in Malaysia: a cointegration analysis of the environmental Kuznets

curve. Energy Policy, 51, pages 184-191.

Lindmark, M. (2002). An EKC-pattern in historical perspective: carbon dioxide

emissions, technology, fuel prices and growth in Sweden 1870-1997. Ecological

Economics, 42(1), pages 333-347.

Dinda, S. (2004). Environmental Kuznets curve hypothesis: a survey. Ecological

Economics, 49(4), pages 431-455.

Akbostancı, E., Türüt-Aşık, S. and Tunç, G. (2009). The relationship between

income and environment in turkey: is there an environmental Kuznets curve? Energy

Policy, 37(3), pages 861-867.

Lise, W. (2006). Decomposition of CO2 emissions over 1980-2003 in Turkey. Energy

Policy, 34(14), pages 1,841-1,852.

Soytas, U. and Sari, R. (2009). Energy consumption, economic growth, and carbon

emissions: challenges faced by an EU candidate member. Ecological Economics,

(6), pages 1,667-1,675.

Ozturk, I. and Acaravci, A. (2013). The long-run and causal analysis of energy,

growth, openness and financial development on carbon emissions in Turkey. Energy

Economics, 36, pages 262-267.

Johansen, S. and Juselius, K. (1990). Maximum likelihood estimation and inference

on cointegration with applications to the demand for money. Oxford Bulletin

of Economics and Statistics, 52(2), pages 169-210.

Dickey, D. and Fuller, W. (1981). Likelihood ratio statistics for autoregressive time

series with a unit root. Econometrica: Journal of the Econometric Society, 49(4), pages


Phillips, P. and Perron, P. (1988). Testing for a unit root in time series regression.

Biometrika, 75(2), pages 335-346.

Kwiatkowski, D., Phillips, P., Schmidt, P. and Shin, Y. (1992). Testing the null

hypothesis of stationarity against the alternative of a unit root: how sure are we

that economic time series have a unit root? Journal of Econometrics, 54(1), pages


Elliott, G., Rothenberg, T. and Stock, J. (1992). Efficient tests for an autoregressive

unit root. The National Bureau of Economic Research, 64(4), pages 813-836.

Ng, S. and Perron, P. (2001). Lag length selection and the construction of unit root

tests with good size and power. Econometrica, 69(6), pages 1,519-1,554.

Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic

Dynamics and Control, 12(2), pages 231-254.

Engle, R. and Granger, C. (1987). Co-integration and error correction: representation,

estimation and testing. Econometrica: Journal of the Econometric Society, 55(2),

pages 251-276.

Katircioglu, S., Kahyalar, N. and Benar, H. (2007). Financial development, trade

and growth triangle: the case of India. International Journal of Social Economics,

(9), pages 586-598.

Granger, C. (1988). Some recent development in a concept of causality. Journal of

Econometrics, 39(1), pages 199-211.

Seker, F. and Cetin, M. (2015). The relationship between renewable energy consumption

and carbon emissions in turkey: an ARDL bounds testing approach.

Proceedings of the 17th International Academic Conference, No. 2604535, pages 382-