The Effect of Economic Freedom on Environmental Quality in OPEC Countries (by using Panel-ARDL Approach)

Document Type : مقالات پژوهشی

Authors

• Roohollah Babaki ¹
• Behnam Elyaspour ²

¹ Assistant Professor of Economics, University of Bojnord

² Assistant Professor of Economics, University of Bojnord, Corresponding Author

https://doi.org/10.22067/erd.2021.18828.0

Abstract

Introduction

Global warming has become one of the biggest environmental issues currently facing mankind. Among the six greenhouse gases, carbon dioxide (Co₂) contributes the most to the greenhouse effect and accounted for approximately 78% of total greenhouse gas emissions from fossil fuel combustion and industrialization from 1970 to 2010. It has become a common aspiration of all countries to reduce greenhouse gas emissions, such as Co₂ and realize a low-carbon circular economy (Liu et al., 2019).
The issue of climate change and global warming has become a great concern for the international community. The issue has also drawn the attention of many financial and economic researchers to empirically investigate the causes of climate change and global warming. However, many studies ignore the influence of economic freedom when investigation the determinants. This gap in the literature has motivated this study to examine the environmental impacts of economic freedom.
In fact, this paper intends to answer this question that whether economic freedom in OPEC member countries, including Iran, has a positive and significant effect on reducing carbon dioxide emissions (improving the quality of the environment). Therefore, the main purpose of this study is to investigate the effect of economic freedom on environmental quality in OPEC member countries during the period 1996-2014 by using the ARDL-panel model.
 
 

Theoretical framework

Economic freedom is often mentioned as a crucial component for improving incentives, productive efforts and an effective resource use. If economic freedom is good or bad for the environment depends largely on how these factors in turn affect the environment. In fact, the main question is that how different economic freedom variables, that have been found to be important for economic growth, affect the environment.
 The Figure (1) shows the channels of economic freedom impact on environmental quality.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Figure 1: Channels affecting economic freedom on environmental quality
Source: Research Classification
 

Methodology

The main purpose of this study was to investigate the effect of economic freedom on environmental quality in eleven selected OPEC member countries (Iran, Algeria, Angola, Congo, Gabon, Kuwait, ‌ Libya, Nigeria, Saudi Arabia, UAE and Venezuela) during 1996-2014 by using the ARDL panel method.
The model of the paper to investigate the effect of economic freedom on Co₂ emissions (which has been used as an alternative variable to environmental quality) based on the Adesina & Mwamba (2019) study is as follows:
Where Co₂ is logarithm of carbon dioxide emissions (tons per capita) in country i at time t; LEF economic freedom index logarithm; LELC per capita electricity logarithm (per kilowatt hour); LGDP per capita GDP logarithm (fixed price); LUP logarithm of urban population ratio (urban population as a percentage of total population); u_i, Constant effects of time and v_it, residuals of the model. It is also intended to include LGDP² (quadratic logarithm of GDP per capita, at a fixed price) in the model for examination the confirmation or non-confirmation of the existence of the Kuznets curve in selected OPEC member countries. For economic freedom data, the Heritage Foundation's Economic Freedom Index is used, and data on other variables are extracted from the World Bank.
 

Results & Discussion

In this section, first, to check the presence of the unit root in the model variables, the unit root test is performed for the variables. Then the co-integration test is performed for a long-term relationship between the model variables and at the of end the results of the model estimation are presented.
According to the results, variables LCo₂ and LUP are integrated from zero order (I(0)) and LGDP, LGDP² and LEP are integrated from first order (I(1)). Also, the co-integration and consequently the long-run relationship between the model variables is confirmed.
Estimation of the model by using ARDL panel approach shows that all long-term coefficients of the research model are significant at the 5% level. In addition, the coefficient of LGDP² is 0.66, which indicates that the Kuznets curve is not established in selected OPEC countries. Also, the error correction term (ECT) is -0.7177, which shows that in each period, 71.77% of the imbalance error is corrected.
 

Conclusions & Suggestions

The results show that economic freedom has had a negative effect on CO₂ emissions in selected OPEC countries during the period of this study. This means that economic freedom improves the quality of the environment. Therefore, based on the findings of this study, it is recommended that the country specific environmental policies should be encouraged in order to succeed in the fight against greenhouse gas emissions or the spread of environmental destruction. Economic policymakers are also advised to put the country on the path of economic liberalization in order to benefit from the positive results of economic liberalization and breaking government monopolies, and to improve the quality of the country environment.

Keywords

• Economic Freedom
• Environmental Quality
• Panel-ARDL

References

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