Does the environmental Kuznets curve exist between globalization and energy consumption? Global evidence from the cross‐correlation method

• Published date: 01 January 2019
• Author: Mantu Kumar Mahalik,Syed Jawad Hussain Shahzad,Shawkat Hammoudeh,Muhammad Shahbaz
• Date: 01 January 2019
• DOI: http://doi.org/10.1002/ijfe.1678

RESEARCH ARTICLE

Does the environmental Kuznets curve exist between

globalization and energy consumption? Global evidence

from the cross‐correlation method

Muhammad Shahbaz

1

| Mantu Kumar Mahalik

2

| Syed Jawad Hussain Shahzad

3

|

Shawkat Hammoudeh

1,4

1

Energy and Sustainable Development,

Montpellier Business School, Montpellier,

France

2

Department of Humanities and Social

Sciences, Indian Institute of Technology

(IIT), Kharagpur, West Bengal, India

3

Montpellier Business School,

Montpellier, France

4

Lebow College of Business, Drexel

University, Philadelphia, Pennsylvania

Correspondence

Syed Jawad Hussain Shahzad, Montpellier

Business School, Montpellier 34080,

France.

Email: j.syed@montpellier‐bs.com

JEL Classification: F6; Q4; Q5

Abstract

We explore the nexus between globalization and energy demand for 86 high‐,

middle‐, and low‐income countries over the period 1970–2015. We use a simple

approach based on the cross‐correlation to understand how globalization and

energy consumption are related in terms of time lags and leads. Our findings

show that for 64 out of the 86 countries (approximately 74%), there is clear

evidence in support of the environmental Kuznets curve (EKC) hypothesis.

The globalized environment (e.g., globalization) has been conducive for the

majority of the countries in reducing their long‐term energy consumption.

From a policy perspective, our findings suggest that the role of “globalization”

in the EKC function should not be underestimated by policymakers and

governments of these countries while designing a policy framework for the

reduction of energy demand in the long run.

KEYWORDS

EKC, energy consumption, globalization

1|INTRODUCTION

The centrality of globalization has been acknowledged as

a very effective world instrument of change in the 21st

century not only because it advances the competition

level between developing and industrial countries but

also because it opens up a wide window of connectivity

among the world's developing and developed economies

at large regarding issues related to international trade,

economic development, and the environment among

other things (Shahbaz, Mahalik, Shah, & Sato, 2016;

Shahbaz, Mallick, Mahalik, & Loganathan, 2015;

Shahbaz, Mallick, Mahalik, & Sadorsky, 2016). For

instance, developing countries often desire to catch up

with developed countries by advancing their economic

performance in the long run.

1

The desire for higher

economic growth and better economic development is

essential for developing countries because the poor of

those economies want to escape the poverty trap and

reduce their socio‐economic inequality. The ambitious

targets of reducing the poverty level and decreasing the

socio‐economic inequality remain to be a strong chal-

lenge for developing countries in their pursuit of higher

economic growth. If these targets continue to be achiev-

able by developing countries, particularly those with

higher economic growth, then a better living standard

will be possible for their people in the long run. However,

developing countries will continue to grow economically,

and the same time will demand a greater share in the

demand growth for energy use. This will not only lead

to a deterioration in the environmental quality but will

also hinder the efforts to enhance the quality of

Received: 8 June 2018 Revised: 17 July 2018 Accepted: 10 September 2018

DOI: 10.1002/ijfe.1678

540 © 2018 John Wiley & Sons, Ltd. Int J Fin Econ. 2019;24:540–557.wileyonlinelibrary.com/journal/ijfe

sustainability of the environment in the long run. If such

environmental concerns persist, it will be much sure that

developing countries will enter into the danger of unsus-

tainable economic growth and development. In such cir-

cumstances, it becomes difficult for developing countries

to achieve the ambitious targets of reducing the poverty

level and income inequality (Mahalik, Mallick, Padhan,

& Sahoo, 2018).

Globalization enters the energy demand function as a

quadratic equation because it affects energy consump-

tion through the scale, composition, and technique

effects. It impacts energy consumption through its influ-

ence on production, consumption, and transportation of

products as well as through the diffusion of technology

across borders. Globalization has led to greater produc-

tion, consumption, and transportations of products,

which in turn have resulted in polluting activities in

developing countries and those polluting activities have

also an adverse effect on advanced economies. When

developing countries are involved in a greater degree of

industrialization and urbanization, globalization leads

to increasing carbon emissions as a consequence of

massive consumption of energy at the domestic level by

developing countries.

2

Eventually, the increasing carbon

emissions linked with a massive energy use of develop-

ing countries will add to global carbon emissions. Thus,

although advanced countries use high‐energy‐intensive

technology in economic activities, they will still suffer

from increasing carbon emissions generated by develop-

ing countries due to the closer integration of these econ-

omies at the global level through globalization (Shahbaz,

Shahzad, & Mahalik, 2017; Shahbaz, Shahzad, Mahalik,

& Sadorsky, 2018).

As a consequence, increasing global carbon emissions

generated by human and economic activities of develop-

ing countries are currently the root cause of continuing

global warming and climate change. In such a situation,

we cannot question the adverse effect of energy con-

sumption on the environment because energy is a key

driver of economic development in both groups of devel-

oping and advanced economies. In this context, environ-

mental concerns can better be addressed by international

cooperation of both developing and developed countries

through advancing a collective climate policy. In an

extreme case, if developing countries do not reduce

carbon emissions, then there is a high possibility of a

further tremendous pressure from the international com-

munity towards achieving an ambitious climate policy.

This is because the developing countries are currently

the main contributor of increasing global carbon emis-

sions in the 21st century due to their march towards

greater industrialization and faster economic growth

(Shahbaz, Mahalik, et al., 2016).

To the best of our knowledge, the recent study of

Shahbaz et al. (2018) is the first attempt that examines

the causal relationship between globalization and energy

consumption for a case of 25 developed economies, in

which the authors find that globalization increases

energy consumption in most of those countries. In a

threatening environment of climate change and global

warming due to globalization, our current effort is also

worthy of undertaking for more countries and using a

more recent methodology. In this context, the study

contributes to the existing environmental economics

literature by utilizing the simple cross‐correlation

recently proposed by Narayan, Saboori, and Soleymani

(2016). In our case, this approach as indicated is used to

verify the validity of the environmental Kuznets curve

(EKC) hypothesis in a new analysis of globalization and

energy consumption for a sample of 86 low‐, middle‐,

and high‐income countries by emphasizing the role of

the time lead and lag effects. In addition, this new

cross‐correlation methodology is a novel extension of

the earlier Narayan and Narayan (2010) approach,

3

which appears to be a very simple and convenient

way for an empirical modelling in the field of applied

energy economics.

This cross‐correlation approach is also chosen due to

the very rooted idea of considering the deciding role of

lags and leads in the relationship between globalization

and carbon emissions to verify the existence of the

EKC hypothesis at the country level. It is also equally

interesting that one can simply propose that the EKC

hypothesis is confirmed for an economy if globalization

is positively and negatively cross‐correlated with past

and future levels of carbon emissions, indicating that

carbon emissions decline with the progressive mode of

globalization over time. This approach further enables

researchers to draw important information from their

empirical analysis regarding whether carbon emissions

will decline or increase with a change in globalization

over time. We find clear evidence in support of the

EKC hypothesis in 64 out of the 86 countries (approxi-

mately 74%). It is interesting to note that the globalized

environment (e.g., globalization) is conducive in reduc-

ing their long‐term energy consumption for the majority

of the countries. The finding that globalization has long

run environmental consequences and higher levels of

globalization in reducing energy consumption will help

policymakers in formulating effective strategies to main-

tain environmental quality.

The remainder of paper is organized as follows.

Section 2 presents a review of related studies. Section 3

highlights the empirical strategy and data used in the

analysis. Section 4 presents the empirical results. Finally,

Section 5 discusses the findings and policy implications.

SHAHBAZ ET AL.541