Energy Consumption and CO₂ Emissions in Bangladesh: Evidence from ARDL and VECM Approaches

Abstract

This study empirically analyzes the multivariate Granger causality connection between economic growth, energy use, financial development, trade openness, and CO₂ emissions in Bangladesh using quarterly data from 1999 to 2023. The study employs the Zivot-Andrews structural break unit root test, the ARDL bounds testing approach to cointegration, OLS and ECM to assess long- and short-term impacts, the VECM Granger causality approach, and the innovative accounting approach (IAA) to verify the robustness of the causality analysis. The results indicate long-term cointegration among the variables and reveal that increased energy consumption, economic expansion, and financial sector growth tend to elevate CO₂ emissions, whereas greater trade openness appears to mitigate them. The causal analysis demonstrates a two-way relationship between energy use and carbon emissions, while the development of the financial sector is shown to Granger-cause CO₂ emissions, economic growth, and trade openness. These insights could offer new perspectives for policymakers in crafting comprehensive strategies that encompass economic, financial, trade, and environmental aspects to maintain Bangladesh's economic growth trajectory.