Is there a cointegrating relationship between Australia's fossil-fuel based carbon dioxide emissions per capita and her GDP per capita?

Abstract

Carbon dioxide (CO2) emission per capita of Australia, a high-income economy with a fossil fuel-rich fuel-mix, is proven to have a strong cointegrating relationship with her gross domestic product (GDP) per capita. A conditional equilibrium correction model (ECM) has been developed to quantify the relationship between the two variables by employing the autoregressive distributed lag bound-testing approach to cointegration. ECM reveals that 1% growth in Australia's GDP per capita induces 0.7% growth in her CO2 emission per capita in the long-run. The short-run dynamics are such that 1% growth in the previous year's GDP per capita leads to about 0.33% growth in current year's CO2 emission per capita. Moreover, any deviation from the long-run equilibrium is corrected in about two years and nine months. The conditional ECM developed is robust against functional form misspecification and have stable regression coefficients over the sample period studied. Thus, it could be used to reliably predict the future CO2 emissions in Australia. [Received: July 15, 2009; Accepted: December 17, 2009].