Financial Development, CO2 Emissions, Fossil Fuel Consumption and Economic Growth: The Case of Turkey

Many studies explored the relationship between income and CO2 emissions, however most of them did not cover the possible effect of financial indicators on their framework. Therefore the present study aims to investigate the causal connection between financial development and ecological degradation in Turkey through a multivariate framework that uses economic growth and fuel consumption as additional determinants of environmental degradation from 1960–2011. To achieve this goal, a Zivot and Andrews (1992) unit root test was first conducted to check the integration order of data. Because variables were integrated at the same order (I[1]), co-integration analysis was applied in order to check the possible long-run equilibrium relationship between variables. Then, the Johansen co-integration test revealed that the variables under investigation are co-integrated in the long run. After establishing the long-run relationship between variables, error correction modeling applied to identify the long-run and short-run coefficients of the variables. The findings show that in the long-run, economic growth has negative and significant effect on carbon emissions (-0.069) while fuel consumption has positive and elastic impact on carbon emissions (2.82). However, the long run coefficient of financial development variable is not statistically significant. As expected, error correction term is negative in sign and statistically significant at 5% suggesting that whole error correction mechanism is working correctly. Therefore ECT implies that CO2 converge to its long-run equilibrium level at 16.97% speed of adjustment by the contribution of GDP, fossil fuel consumption and financial development. Lastly, Granger causality test based on ECM is conducted to reveal the existence and direction of the causality among variables. The results show that there is uni- directional causality running from financial development and economic growth to carbon emissions and fuel consumption, and from carbon emissions to fuel consumption. Results suggest that by building up fundamental ecological norms and recognizing natural venture priorities, Turkey can coordinate feasible arrangements into its general financial improvement, in this way protecting its environment well towards the future. Keywords: CO2 emissions, Financial development, Economic growth, Fossil fuel consumption, Granger Causality