skip to main content

Examining the Relationship Between Energy Consumption, Economic Growth and Environmental Degradation in Indonesia: Do Capital and Trade Openness Matter?

1Department of Economics and Development Studies, Faculty of Economics and Business, Jenderal Soedirman University, Purwokerto, Indonesia

2Department of Business Administration, Specialization of Managerial Economics, Faculty of Commercial Studies, University of Gezira, Al Hilaliya, Sudan

Received: 4 Apr 2021; Revised: 19 May 2021; Accepted: 27 May 2021; Available online: 2 Jun 2021; Published: 1 Nov 2021.
Editor(s): Grigorios Kyriakopoulos
Open Access Copyright (c) 2021 The Authors. Published by Centre of Biomass and Renewable Energy (CBIORE)
Creative Commons License This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Citation Format:

This paper examines the relationship between energy consumption, economic growth, and environmental degradation in Indonesia in 1965-2018 with the inclusion of gross capital formation and trade openness as relevant factors. The autoregressive distributed lag model to cointegration, fully modified ordinary least squares, dynamic ordinary least squares, and canonical cointegrating regression approach applied to estimate this relationship. The result of cointegration confirms the existence of a cointegration relationship between energy consumption, economic growth, gross fixed capital formation, trade openness, and environmental degradation. The empirical result, in the long run, indicates that energy consumption, economic growth, and trade openness have a positive relationship with environmental degradation. However, the gross fixed capital formation was found to be negatively associated with environmental degradation. It implies that gross fixed capital formation plays a pivotal role in reducing environmental degradation in Indonesia.  The error correction model coefficient indicates that the deviation of CO2 emissions from its long run equilibrium will be adjusted by 0.53% through the short run channel per annum. The findings of this paper propose implementing an energy policy that focuses on energy from environmentally friendly sources. It is also recommended to reverse the effect of openness to the international markets to improve and facilitate access to advanced and environmentally friendly technologies to mitigate environmental degradation and improve environmental quality.

Fulltext View|Download
Keywords: Energy consumption; Economic growth; Capital formation; Environmental degradation; ARDL

Article Metrics:

  1. Acheampong, A. O. (2018). Economic growth, CO2 emissions and energy consumption: What causes what and where? Energy Economics, 74, 677–692.
  2. Adebayo, T., Akinsola, G., Odugbesan, J., & Olanrewaju, V. (2021). Determinants of Environmental Degradation in Thailand: Empirical Evidence from ARDL and Wavelet Coherence Approaches. Pollution, 7(1), 181–196.
  3. Adebayo, T. S. (2021). Testing the EKC Hypothesis in Indonesia : Empirical Evidence from the ARDL-Based Bounds and Wavelet Coherence Approaches. Applied Economics Journal, 28 (1), 1–27
  4. Adebayo, T. S., & Akinsola, G. D. (2021). Investigating the Causal Linkage among Economic Growth, Energy Consumption and CO2 Emissions in Thailand: An Application of the Wavelet Coherence Approach. International Journal of Renewable Energy Development, 10(1), 17–26.
  5. Ahmad, N., Du, L., Lu, J., Wang, J., Li, H. Z., & Hashmi, M. Z. (2017). Modelling the CO2 emissions and economic growth in Croatia: Is there any environmental Kuznets curve? Energy, 123, 164–172.
  6. Andreoni, V., & Galmarini, S. (2016). Drivers in CO2 emissions variation: A decomposition analysis for 33 world countries. Energy, 103, 27–37.
  7. Ansari, M. A., Haider, S., & Khan, N. A. (2020). Does trade openness affects global carbon dioxide emissions: Evidence from the top CO2 emitters. Management of Environmental Quality: An International Journal, 31(1), 32–53.
  8. Bukhari, N., Shahzadi, K., & Shakil Ahmad, M. (2014). Consequence of FDI on CO2 emissions in case of Pakistan. Middle - East Journal of Scientific Research, 20(9), 1183–1189.
  9. Chen, F., Jiang, G., & Kitila, G. M. (2021). Trade Openness and CO2 Emissions: The Heterogeneous and Mediating Effects for the Belt and Road Countries. Sustainability, 13(4), 1958.
  10. Dickey, D. A., & Fuller, W. A. (1979). Distribution of the Estimators for Autoregressive Time Series With a Unit Root, Journal of the American Statistical Association, Vol. No. 366, pp. . 74(March 2013), 427–431
  11. Dogan, E., & Turkekul, B. (2016). CO2 emissions, real output, energy consumption, trade, urbanization and financial development: testing the EKC hypothesis for the USA. Environmental Science and Pollution Research, 23(2), 1203–1213.
  12. Farhani, S., Chaibi, A., & Rault, C. (2014). CO2 emissions, output, energy consumption, and trade in Tunisia. Economic Modelling, 38, 426–434.
  13. Gasimli, O., ul Haq, I., Gamage, S. K. N., Shihadeh, F., Rajapakshe, P. S. K., & Shafiq, M. (2019). Energy, Trade, Urbanization and Environmental Degradation Nexus in Sri Lanka: Bounds Testing Approach. Energies, 12(9), 1–15.
  14. Hamit-Haggar, M. (2012). Greenhouse gas emissions, energy consumption and economic growth: A panel cointegration analysis from Canadian industrial sector perspective. Energy Economics, 34(1), 358–364.
  15. Jafari, Y., Othman, J., & Nor, A. H. S. M. (2012). Energy consumption, economic growth and environmental pollutants in Indonesia. Journal of Policy Modeling, 34(6), 879–889.
  16. Jamel, L., & Abdelkader, D. (2016). Do energy consumption and economic growth lead to environmental degradation? Evidence from Asian economies. Cogent Economics and Finance, 4(1).
  17. Jayanthakumaran, K., Verma, R., & Liu, Y. (2012). CO 2 emissions, energy consumption, trade and income: A comparative analysis of China and India. Energy Policy, 42(June 2011), 450–460.
  18. Kasman, A., & Duman, Y. S. (2015). CO2 emissions, economic growth, energy consumption, trade and urbanization in new EU member and candidate countries: A panel data analysis. Economic Modelling, 44, 97–103.
  19. Koengkan, M., Losekann, L. D., & Fuinhas, J. A. (2019). The relationship between economic growth, consumption of energy, and environmental degradation: renewed evidence from Andean community nations. Environment Systems and Decisions, 39(1), 95–107.
  20. Ling, C. H., Ahmed, K., Binti Muhamad, R., & Shahbaz, M. (2015). Decomposing the trade-environment nexus for Malaysia: what do the technique, scale, composition, and comparative advantage effect indicate? Environmental Science and Pollution Research, 22(24), 20131–20142.
  21. Majeed, M. T., Tauqir, A., Mazhar, M., & Samreen, I. (2021). Asymmetric effects of energy consumption and economic growth on ecological footprint: new evidence from Pakistan. Environmental Science and Pollution Research.
  22. Mesagan, Ekundayo P., Isola, W. A., & Ajide, K. B. (2019). The capital investment channel of environmental improvement: evidence from BRICS. Environment, Development and Sustainability, 21(4), 1561–1582.
  23. Mesagan, Ekundayo Peter, & Nwachukwu, M. I. (2018). Determinants of Environmental Quality in Nigeria: Assessing the Role of Financial Development. Econometric Research in Finance, 3(1), 55–78.
  24. OECD. (2021). Trade and the environment - OECD. Retrieved April 3, 2021, from
  25. Ozcan, B., Tzeremes, P. G., & Tzeremes, N. G. (2020). Energy consumption, economic growth and environmental degradation in OECD countries. Economic Modelling, 84(September 2018), 203–213.
  26. Ozturk, I., & Acaravci, A. (2010). CO2 emissions, energy consumption and economic growth in Turkey. Renewable and Sustainable Energy Reviews, 14(9), 3220–3225.
  27. Pala, A. (2020). Energy and economic growth in G20 countries: Panel cointegration analysis. Economics and Business Letters, 9(2), 56–72.
  28. Pao, H. T., & Tsai, C. M. (2010). CO2 emissions, energy consumption and economic growth in BRIC countries. Energy Policy, 38(12), 7850–7860.
  29. Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326.
  30. Phillips, P. C. B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335–346.
  31. Phrakhruopatnontakitti, Watthanabut, B., & Jermsittiparsert, K. (2020). Energy consumption, economic growth and environmental degradation in 4 Asian countries: Malaysia, Myanmar, Vietnam and Thailand. International Journal of Energy Economics and Policy, 10(2), 529–539.
  32. Purnama, H., Gunarto, T., & Budiarty, I. (2020). Effects of energy consumption, economic growth and urbanization on Indonesian environmental quality. International Journal of Energy Economics and Policy, 10(6), 580–587.
  33. Rauf, A., Liu, X., Amin, W., Ozturk, I., Rehman, O. U., & Sarwar, S. (2018). Energy and ecological sustainability: Challenges and panoramas in belt and road initiative countries. Sustainability (Switzerland), 10(8), 1–21.
  34. Shahbaz, M., Hye, Q. M. A., Tiwari, A. K., & Leitão, N. C. (2013). Economic growth, energy consumption, financial development, international trade and CO2 emissions in Indonesia. Renewable and Sustainable Energy Reviews, 25, 109–121.
  35. Soytas, U., Sari, R., & Ewing, B. T. (2007). Energy consumption, income, and carbon emissions in the United States. Ecological Economics, 62(3–4), 482–489.
  36. Statistical Review of World Energy | Energy economics | Home. (2021).
  37. Tzeremes, P. (2018). Time-varying causality between energy consumption, CO2 emissions, and economic growth: evidence from US states. Environmental Science and Pollution Research, 25(6), 6044–6060.
  38. World Bank. (2021). World Development Indicators | DataBank.
  39. Zhang, L., Li, Z., Kirikkaleli, D., Adebayo, T. S., Adeshola, I., & Akinsola, G. D. (2021). Modeling CO2 emissions in Malaysia: an application of Maki cointegration and wavelet coherence tests. Environmental Science and Pollution Research.

Last update:

No citation recorded.

Last update:

No citation recorded.