Role of Economic Growth, Financial Development, Trade, Energy and FDI in Environmental Kuznets Curve for Lithuania: Evidence from ARDL Bounds Testing Approach

Abstract

This paper examines the long-run relationship between carbon dioxide (CO₂) emission and economic growth, financial development, trade, energy consumption, and foreign direct investment in the case of Lithuania by employing time series data of 1989-2018. In particular, this paper aims to test whether the Environmental Kuznets Curve (EKC) relationship for economic growth and financial development holds or not. The autoregressive distributed lag (ARDL) bounds testing procedure is employed for the empirical analysis. The results validate the existence of EKC in the long-run as well as in the short-run since there is an inverted U-shaped relation between CO₂ emissions and economic growth. Conversely, we could not validate the EKC relationship between CO₂ emissions and financial development. Trade and energy consumption are other significant determinants of CO₂ emissions. The causality analysis results show that unidirectional causality runs from economic growth to CO₂ emissions and trade to CO₂ emissions. The validity of the EKC hypothesis indicates that Lithuania can achieve short-term, medium-term, and long-term climate change mitigation and adoption goals and objectives approved by the Parliament of the Republic of Lithuania without deteriorating its economic growth.