The impact of economic growth on CO 2 emissions in Australia: the environmental Kuznets curve and the decoupling index

Abstract

Australia is the sixth largest country in the world, celebrating its 26th consecutive year without a recession. However, the country is one of the ten largest emitters of greenhouse gases, mainly caused by energy use. As such, Australia is facing a trade-off between economic growth and reducing carbon dioxide (CO₂) emissions. This paper empirically analyses the relationship between economic growth and CO₂ emissions in Australia, based on annual data from 1965 to 2016, considering the consumption of the fossil fuels oil and coal and renewable energy. This analysis is performed using the environmental Kuznets curve (EKC) and the Decoupling Index (DI). The EKC is assessed by employing the autoregressive distributed lag model. In addition, a robustness check is provided through the vector error correction model, which allows for the employment of the Granger causality test. The results show that in Australia, there is evidence for the EKC hypothesis, and that the country is undergoing increasing relative decoupling. These results mean that economic growth causes CO₂ emissions and consequently environmental degradation. To achieve environmental targets and reduce the rate of CO₂ emissions while continuing to grow, Australia needs to implement measures and policies to cut CO₂ emissions, such as energy demand management and control, energy efficiency, reducing fossil fuel consumption, and investing in renewable energy technology.