Causal Relationship between Crude Oil Price, Energy Consumption and Carbon Dioxide (CO) Emissions in Ecuador

Abstract

This study examines the causal relationship between crude oil price, energy consumption and CO emissions in Ecuador over the period 1971–2013 incorporating indicators of economic performance. ARDL bounds testing approach to cointegration provides evidence of cointegration between the variables in the presence of structural break in the series. The long‐run effect of energy consumption on CO emissions in the oil‐dependent economy is found to be positive and statistically significant. The long‐run and short‐run causal effects of crude oil price on energy consumption and CO emissions in the economy are found positive and statistically significant, suggesting that higher crude oil prices create economic conditions that generate more energy consumption and CO emissions in the Ecuadorean economy. The direction of causality among the variables examined using Toda‐Yamamoto Granger causality test procedure suggests that a unidirectional causality runs from crude oil price to energy consumption and economic growth, and bidirectional causality between energy consumption and CO emissions. A unidirectional causality that flows from CO emissions to economic growth through financial development is also observed in the economy.