Energy 36 (2011) 685e693

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Energy
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Multivariate Granger causality between CO2 emissions, energy consumption, FDI

(foreign direct investment) and GDP (gross domestic product): Evidence from
a panel of BRIC (Brazil, Russian Federation, India, and China) countries
Hsiao-Tien Pao, Chung-Ming Tsai*
Department of Management Science, National Chiao Tung University, 1001 Ta Hsueh Road, Hsinchu 30010, Taiwan, ROC

a r t i c l e i n f o a b s t r a c t

Article history: This paper addresses the impact of both economic growth and financial development on environmental
Received 1 April 2010 degradation using a panel cointegration technique for the period between 1980 and 2007, except for
Received in revised form Russia (1992e2007). In long-run equilibrium, CO2 emissions appear to be energy consumption elastic
19 August 2010
and FDI inelastic, and the results seem to support the Environmental Kuznets Curve (EKC) hypothesis.
Accepted 23 September 2010
The causality results indicate that there exists strong bidirectional causality between emissions and FDI
Available online 21 December 2010
and unidirectional strong causality running from output to FDI. The evidence seems to support the
pollution haven and both the halo and scale effects. Therefore, in attracting FDI, developing countries
Keywords:
Energy consumption
should strictly examine the qualifications for foreign investment or to promote environmental protection
CO2 emissions through the coordinated know-how and technological transfer with foreign companies to avoid envi-
FDI ronmental damage. Additionally, there exists strong output-emissions and output-energy consumption
Panel cointegration bidirectional causality, while there is unidirectional strong causality running from energy consumption
BRIC to emissions. Overall, the method of managing both energy demand and FDI and increasing both
investment in the energy supply and energy efficiency to reduce CO2 emissions and without compro-
mising the country’s competitiveness can be adopted by energy-dependent BRIC countries.
Ó 2010 Elsevier Ltd. All rights reserved.

1. Introduction
Economic development today is global. Many companies are
taking part in the global distribution of investment, and many
countries encourage the use of foreign investment to promote their
economic growth. However, the environmental problems hidden
behind this situation should not be overlooked. In recent years, air
pollution and global climate change issues caused by greenhouse
gases have become the focus of international attention. The Inter-
governmental Panel on Climate Change (IPCC) [1] and the Stern [2]
report both demonstrate that the most important environmental
problem of our age is global warming. CO2 is considered to be the
primary greenhouse gas responsible for global warming, and its
regulation has become an important intergovernmental issue [3].
The objective of the 1997 Kyoto protocol was to reduce greenhouse
gases (GHG), which cause climate change, and it demanded
a reduction of GHG emissions to 5.2% lower than the 1990 level
during the period from 2008 to 2012. This came into force in 2005.
* Corresponding author. Tel.: þ886 3 5131578; fax: þ886 3 5710102.
E-mail address: charming0723@gmail.com (C.-M. Tsai).
Though BRIC countries (Brazil, Russian Federation, India, and China)
signed the Kyoto protocol to curb emission levels, there are still
environmental concerns given the region’s recent economic growth.
Goldman Sachs [4] argues that BRIC economies could become
a much larger force in the world economy than the G6 (United
States, Japan, Germany, France, Italy, and the United Kingdom) in
less than 40 years and by 2025 could account for over half the size
of the G6. However, during the last few years, these economies have
experienced profound structural changes that continue to influence
the evolution of regional CO2 output, with potentially adverse
consequences for global mitigation strategies [5]. In 1990, Brazil’s
CO2 emissions represented 0.94% of the world’s total, the Russian
Federation’s was 3.80%, India’s was 3.00% and China’s was 11.00%.
By 2007, BRIC countries’ emissions increased; Brazil’s was 1.15% of
the world’s total, Russia’s was 6%, India’s was 5.00% and China’s was
16.00% [6]. According to the figures by the U.N. Climate Change
Secretariat, the top five sources of greenhouse gases worldwide
were the United States, China, Russia, India and Japan. Brazil is the
eighth largest emitter of greenhouse gases and the third largest
emitter in the developing world after China and India, according to
2000 World Resources Institute figures. However, the combustion
of fossil fuels is the largest single contributor to CO2 emissions and

0360-5442/$ e see front matter Ó 2010 Elsevier Ltd. All rights reserved.
doi:10.1016/j.energy.2010.09.041
686 H.-T. Pao, C.-M. Tsai / Energy 36 (2011) 685e693
total GHG emissions and of all the major sources has grown most
rapidly from 1970 to the present.
Additionally, most studies discuss environmental pollution and
inward foreign direct investment (FDI) across a number of devel-
oping as well as developed countries. BRIC countries are the largest
among fast-growing emerging economies; their influence on the
world economy is much higher than that of any other smaller
developing country. With this trend, the BRICs have attracted
increasingly more FDI inflow and have developed rapidly, beyond
the realms of imagination. The four BRIC economics together
attracted over $144.57 billion in 2005, which is about 16% of the
total FDI inflow in the world. These large FDI inflows to BRICs were
mostly driven by China, which has attracted over $72.4 billion or
7.90% of the world’s total FDI inflows in 2005 [7]. Today, BRIC
countries are one of the best investment destinations in the world.
There is a large amount of literature to explain the causal rela-
tionship between energy consumption and GDP, FDI and GDP, as
well as some of CO2 emissions, energy consumption and GDP using
a multivariate framework over the past two decades. These studies
are often limited by the measurement method, which reduces the
reliability of information on environmental policies. These limita-
tions include focusing on a single country, a too-short period
covered by the data sample, and the omission of important vari-
ables. To reduce these problems in econometric estimation, this
study further extends the above-mentioned multivariate frame-
work by including the impact of foreign direct investment into the
nexus using a panel data set. However, there is no systematic time
series investigation so far analyzing the relationship between
pollutant emissions, energy use, output and FDI by BRIC countries.
This research seeks to fill the gap in the literature. The dynamic
interrelationship in the output-energy-FDI-environment nexus is
analyzed by applying a panel cointegration technique and a panel
causality link in the short-run and long-run.
The remainder of this paper is organized in the following
fashion. Section 2 presents a brief review of the economic, energy
use, environmental pollution and FDI profile of the countries.
Section 3 outlines the model and estimation methodology, and the
econometric results are presented and discussed in the fourth
section. Some policy implications and conclusions are provided in
the final section.
2. Brief literature review
The relationship between economic growth and environmental
pollution, as well as economic growth and energy consumption,
has been intensively analyzed empirically over the past two
decades. However, the empirical evidence remains controversial
and ambiguous to date. The first nexus is closely related to testing
the validity of the Environmental Kuznets Curve (EKC) hypothesis.
The EKC hypothesis postulates that the relationship between
economic development and the environment resembles an inver-
ted-U curve. That is, environmental pollution levels increase as
a country develops but begin to decrease as rising incomes pass
a turning point. This hypothesis was first proposed and tested by
Grossman and Krueger [8]; articles [9,10] provide extensive review
surveys of these studies. Further examples consist of articles
[11e13]. However, a higher national income does not necessarily
warrant greater efforts to contain the emissions of pollutants. More
recently, articles [14e16] examine the time series dynamics
between income and emissions to infer the direction of causality.
The empirical results appear to be inconclusive.
The second strand is related to the output-energy nexus. This
nexus suggests that economic development and output may be
jointly determined because higher economic development requires
more energy consumption. Likewise, more efficient energy use
needs a higher level of economic development. Therefore, the
direction of causality may not be determined a priori. Following the
seminal study by Kraft and Kraft [17], an increasing number of
studies have assessed the empirical evidence by employing
Granger causality and cointegration models. Recent studies include
those in articles [18e23].
A recent and emerging line of literature seems to analyze both
nexuses in the same framework. This approach facilitates the
examination of the dynamic relationship between economic
growth, energy consumption and environmental pollutants alto-
gether. Ang [24] and Soytas et al. [25] initiated this combined line of
research. Recent work on this issue includes articles [26e30].
Although the majority of the studies are focused on economic
development and environmental degradation, many articles have
pointed out that another possible determinant of environmental
performance is financial development. Frankel and Romer [31]
found that financial liberalization and development may attract
FDI and higher degrees of R&D investments, which in turn can speed
up economic growth and hence affect the dynamic of the environ-
mental performance. Birdsall and Wheeler [32] and Frankel and
Rose [33] indicated that financial development provides developing
countries with the motive and opportunity to use new technology,
help them with clean and environmentally friendly production, and
consequently improve the global environment at large and enhance
the sustainability of regional development. Additionally, Jensen [34]
and the World Bank [35] have asserted that although financial
development may enhance economic growth, it may result in more
industrial pollution and environmental degradation. Tamazian et al.
[5] found that a higher degree of economic and financial develop-
ment decreases environmental degradation. In this study, we
employed FDI inflows as a measure of financial development.
A host of studies link environmental pollution and FDI across
a number of developing as well as developed countries [36e40].
Several alternative economic rationales supporting relationships
between the two variables have been proposed in the literature.
According to the pollution haven hypothesis, weak environmental
regulation in a host country may attract inward FDI by profit-driven
companies eager to circumvent costly regulatory compliance in their
home countries [34,37e39]. Second, according to the pollution-halo
hypothesis, in applying a universal environmental standard, multi-
nationals engaging in FDI will tend to spread its greener technology to
their counterparts in the host country [32,40,41]. Finally, a scale effect
would arise to the extent that multinational FDI operations would
significantly contribute to a host nation’s industrial output and in turn
the overall pollution level [40,42]. Despite these clear theoretical
arguments, empirical work designed to test these hypotheses has so
far been unable to provide conclusive results [36]. Therefore, this
research argues that there are strong dynamic interrelationships
between output, energy consumption, environmental pollutants and
FDI, which should be investigated in the same multivariate framework.
3. Model and methodology
3.1. Model
Following the empirical literature in energy economics, it is
plausible to form a long-run relationship between CO2 emissions,
energy consumption, FDI and economic growth in a linear loga-
rithm quadratic form, with a view of testing the validity of the EKC
hypothesis, as follows [26e28]:
LCOit ¼ b0 þ b1 LENGit þ b2 LFDIit þ b3 LGDPit þ b4 LGDP2it þuit (1)
where i ¼ 1,.,N denotes the country, t ¼ 1,.,T denotes the time
period, and uit is assumed to be serially uncorrelated error term.
 H.-T. Pao, C.-M. Tsai / Energy 36 (2011) 685e693 687

Both mixed fixed and random effects and two-way random effects
are not supported for unbalanced data in EViews. The variables LCO,
LENG, LFDI and LGDP represent the natural logarithms of CO2
emissions, the total energy consumption, FDI net inflows and real
GDP, respectively. The expected signs of energy consumption and
FDI are positive. Because a higher level of energy consumption
should result in greater economic activity and stimulate CO2
emissions while FDI inflows increase local production activities,
thereby increasing the use and consumption of resources, and
cause more pollution emissions. Under the EKC hypothesis, the sign
of b3 is expected to be positive, whereas a negative sign is expected
for b4. If the sign on the LGDP2 is found to be statistically insignif-
icant, this indicates a monotonic increase in the relationship
between per capita CO2 emissions and per capita income [28].
the within-dimension tests in the sense that they allow for the
heterogeneity of the parameters across countries. The Kao test
follows the same basic approach as the Pedroni tests but specifies
cross section specific intercepts and homogeneous coefficients
during the first stage. Additionally, the Fisher test is a combined
Johansen and Juselius test [55]. If cointegration exists among the
variables, the ordinary least squares (OLS) method is applied to
ensure that the estimate Eq. (1) does not lead to a spurious
regression result. Furthermore, the parameters estimated by OLS
are super-consistent [56]. The b1, b2, b3 and b4 are the long-run
energy consumption elasticity, FDI elasticity, real GDP elasticity and
GDP2 elasticity, respectively.
3.3. Granger causality

3.2. Cointegration methodology
In the empirical analysis, we test for the existences of a long-run
relationship among the variables (estimation of Eq. (1)), and the
utilization of the error-correction model (ECM) captures the short-
run dynamics of the variables. The analysis is done in three steps.
The first step is to verify the order of integration for the variables
because the various cointegration tests are valid only if the vari-
ables have the same order of integration. Five types of unit root
tests, Levin, Lin and Chu (LLC) [43], Breitung [44], Im, Pesaran and
Next, we examine the direction of causality between the vari-
ables in a panel context. The existence of cointegration indicates
that there are long-run equilibrium relationships among the vari-
ables and thereby Granger causality among them in at least one
direction [54,57]. The vector error-correction model (VECM) is used
for correcting disequilibrium in the cointegration relationship,
captured by the ECT, as well as to test for long- and short-run
causality among cointegrated variables. The panel-based VECM is
specified as follows [28,29,58]:
where i ¼ 1,.,N denotes the country; t ¼ 1,.,T denotes the time

2 3 2 2
3 DLCO 3
DLCOit 2 3 b11p b12p b13p b14p b15p 2 3 2 3
a1 itp q1 31it
6 DLECit 7 6 DLEC 7
6 7 6 a2 7 X r 66 b21p b22p b23p b24p b25p 76
76 itp 7 6 q2 7 6 32it 7
6 DLFDIit 7 ¼ 6
6 a3
7
7þ 6 b31p b32p b33p b34p b35p 7 DLFDIitp 7 6
7 þ 6 q3
7 6
7ECTit1 þ 6 33it
7
7
6 7 4a 5 6 76 7 4q 5 43 5
(2)
4 DLGDPit 5 4 p ¼ 14 b41p b42p b43p b44p b45p 56
4 DLGDPitp 5 4 4it
DLGDPit
2 a5 b51p b52p b53p b54p b55p DLGDP2itp q5 35it

Shin (IPS) [45], a Fisher-type test using Augmented Dickey-Fuller
(ADF) [46,47] and Phillips-Perron (PP) [48], are employed. Zapata
and Rambaldi [49] have noted that if there is uncertainty as to
whether the variables are I(0) or I(1) (integrated of order one), the
Toda and Yamamoto (TY) [50] procedure is performed to be on the
safe side. The TY procedure does not require knowledge on
cointegration.
In the second step, when all series are integrated into the same
order, the Johansen Fisher [46], Kao [51] and Pedroni [52,53]
methods are used to test the panel cointegration relationship,
which are based on the estimated residuals of Eq. (1). The Pedroni
and Kao tests are based on the Engle-Granger [54] two-step
(residual-based) cointegration tests. In total, Pedroni provides
seven statistics to test the null hypothesis of no cointegration in the
heterogeneous panels. These tests can be classified as either falling
within the dimension (panel tests) or between dimensions (group
tests). These tests are all based on the residuals from Eq. (1) and are
variants of the ADF and PP tests. The within-dimension tests pool
the autoregressive coefficients across different members of the
panel. The between dimension tests are less restrictive than
period; 3it is assumed to be serially uncorrelated error term; ECT is
the lagged error-correction term derived from the long-run coin-
tegrating relationship. Both mixed fixed and random effects and
two-way random effects are not supported for unbalanced data in
EViews. Following Abdalla & Murinde [59] the optimal lag length in
each equation for linear system (2) is selected through maximizing
the value of the R2 and AIC criteria
4. Empirical results
4.1. Data analysis
The focus of this study is to explore the relationship among real
GDP, energy consumption, FDI and emissions in BRIC countries. The
annual data for emissions and energy consumption are obtained
from Energy Information Administration (EIA), and real GDP and
FDI are obtained from the World Bank Development Indicators
(WDI) from 1980 to 2007, except for Russia. In terms of Russia,
because of the disintegration of the Soviet Union in 1991 and the
availability of less information for this earlier period, the period

Table 1
Summary statistics (before taking logarithm), 1992e2007.

Country CO2 ENG FDI GDP

Mean S.D. Mean S.D. Mean S.D. Mean S.D.

Brazil 1.864 0.144 46.203 3.751 16.949 11.111 3716.933 249.113
China 2.909 0.903 35.839 11.326 50.303 28.782 997.173 395.092
India 0.972 0.127 13.093 1.853 5.788 6.975 463.334 106.998
Russia 11.173 0.984 196.426 16.402 9.289 14.342 1974.399 410.277
688 H.-T. Pao, C.-M. Tsai / Energy 36 (2011) 685e693
140
120
100
80
60
40
20
1980 1985
Fig. 1. Foregin direct investment (before taking logarithm) (current US$ Billion).
between 1992 and 2007 is used in this study. Per capita CO2
emissions in metric tons of carbon dioxide are measured by the
consumption of energy. Per capita energy consumption is
measured in million Btu (British thermal unit). FDI is measured by
the net inflow of foreign direct investment (in current US$ Billion).
Per capita real GDP is measured in US dollars at 2000 prices.
Table 1 provides a statistical summary associated with the actual
values of four variables for each country. The highest means of per
capita emissions (11.173) and per capita energy consumption
(196.426) are both found in Russia, with Brazil having the highest
real GDP per capita mean (3716.933). On the other hand, China has
the highest mean of FDI (50.303). The lowest means of per capita
emissions (0.972), per capita energy consumption (13.093), FDI
(5.788) and per capita real GDP (463.334) are found in India.
Additionally, Russia displays the greatest variation (defined by the
standard deviation) in per capita emissions (0.984), energy use
(16.402) and real GDP (410.227); China has the highest variation in
FDI (28.782), while India exhibits the least variation in each vari-
able. Overall, among BRIC countries, Russia has the greatest means
and variances of per capita emissions and energy consumption,
while India has the lowest means and variances for per capita
14
12
10
0
1980 1985
Fig. 2. Per capita CO2 emissions (before taking logarithm) (metric tons of carbon dioxide per capita).
1990 1995 2000 2005
Brazil China
India Russia
emissions, energy consumption, FDI and per capita output. China
has the greatest means and variances of FDI, as the WTO-mandated
liberalization of Chinese foreign investment has stimulated FDI in
financial services, real estate, construction, and other non-
manufacturing sectors [60]. Brazil has the highest real GDP per
capita mean and the second lowest emissions per capita mean
(1.864). Brazil is the world’s largest producer and consumer of
ethanol, which it has added to gasoline since the 1970s. This has
reduced both greenhouse gas emissions and pollution in urban
centers, where more than 80% of the 180 million Brazilians live [61].
Figs. 1e4 show the changing trends for each series of the BRIC
countries. Fig. 1 shows that four countries have shown significant
increases in FDI in recent years. Figs. 2e4 lead to the observation
that the per capita level of the Russian series for three variables
(CO2, energy consumption and GDP) differs from the level of the
other three countries. Additionally, the Russian series show another
trending behavior in addition to the other series. The Russian series
decline from the beginning in 1992 to the end-nineties and begin to
increase after that, whereas the series from other countries show an
almost monotonic increase over the entire time span. Furthermore,
the China series has shown the greatest increase since 2000.
1990 1995 2000 2005
Brazil China
India Russia
 H.-T. Pao, C.-M. Tsai / Energy 36 (2011) 685e693 689

240

200

160

120

80

40

0
1980 1985 1990 1995 2000 2005

Brazil China
India Russia

Fig. 3. Per capita energy consumption (before taking logarithm) (Million Btu per Person).

Goldman Sachs’ presentation of the BRICs report, which since its
initial publication in 2003 has shown significant increasing trends
in FDI, is worth our attention.
Table 2 shows the percentage growth rates in 2007 for each
series for BRIC countries. Here, fifteen-year, ten-year, and five-year
growth rates are calculated as growth between 1992 and 2007, 1997
and 2007 and between 2002 and 2007, respectively. China had the
greatest fifteen-year, ten-year, and five-year growth rates in per
capita emissions (5.564%, 6.545%, 11.687%), energy use (5.916%,
6.812%, 11.478%) and real GDP (9.321%, 8.864%, 10.375%) but does
not have the largest amount for each variable (Figs. 1e2 and Fig. 4).
In the most recent five years (2002e2007), Brazil had the smallest
growth rates in every variables (1.373%, 2.088%, 15.823%, 2.687%),
but it has the largest real GDP (Fig. 4). It is worth noting that Rus-
sia’s CO2 emissions and energy consumption both showed negative
growth between 1992 and 2007, which may have been caused by
the disintegration of the Soviet Union in 1991; during this time, the
entire industry and economy were undergoing a transition. On the
whole, the growth rate of all of the variables in the BRIC countries
was higher than the growth rate of the world in the most recent five
years (2000e2005). Therefore, in the foreseeable future, the
potential of the BRIC will gradually be taken seriously.
For modeling purposes, all of the data have been converted into
natural logarithms prior to conducting the empirical analysis. In
this way, the series can be interpreted in growth terms after
assessing the first difference.
4.2. Panel unit roots and panel cointegration tests
The time series properties of the variables in Eq. (1) are checked
through five types of panel unit root tests: LLC, Breitung, IPS, ADF
and PP tests. Both LLC and Breitung tests assume that there is
a common unit root process across the cross-sections. For these
tests, the null hypothesis is that there is a unit root, while the
alternative hypothesis is that there is no unit root. The other tests
assume that there are individual unit root processes across the
cross-sections. For these tests, the null hypothesis is that there is
a unit root, while the alternative hypothesis is that some cross-
sections do not have a unit root. On balance, the results of Table 3
demonstrate that all of the series in Eq. (1) appear to contain

5,000

4,000

3,000

2,000

1,000

0
1980 1985 1990 1995 2000 2005

Brazil China
India Russia

Fig. 4. Per capita real GDP (before taking logarithm) (constant US $2000).
690 H.-T. Pao, C.-M. Tsai / Energy 36 (2011) 685e693

Table 2
Average growth rates in percent for emissions, energy use and real GDP (before taking logarithm), 1992e2007.

Brazil China India Russia BRICs The world

Panel A: Carbon dioxide emissions (metric tons per capita)
15 year growth 1.991 5.564 3.250 1.040 0.582 0.913
10 year growth 0.583 6.545 3.000 1.695 2.601 1.338
5 year growth 1.373 11.687 4.633 1.787 3.842 2.617
Panel B: Energy use (million Btu per capita)
15 year growth 1.972 5.916 3.477 0.454 0.806 0.896
10 year growth 1.160 6.812 3.376 2.214 2.737 1.181
5 year growth 2.088 11.478 5.139 2.405 3.749 2.147
Panel C: FDI (in current US$ Billion)
15 year growth 20.688 18.277 34.959 29.349 27.552 19.145
10 year growth 5.815 12.082 21.515 27.476 13.347 17.366
5 year growth 15.823 22.927 34.877 73.927 27.552 25.816
Panel D: Real GDP (US $2000 per capita)
15 year growth 1.777 9.321 5.067 2.076 2.995 1.739
10 year growth 1.458 8.864 5.488 6.066 4.073 1.834
5 year growth 2.687 10.375 7.428 7.816 5.725 2.387

a panel unit root in their levels but are stationary in their first
differences, indicating that they are integrated at order one, i.e., I(1).
Having established that each of the four variables is I(1), the
panel cointegration between CO2 emissions and its determinants is
checked using Pedroni, Kao and Fisher tests for unbalanced BRIC
panel data, and the results are presented in Table 4. According to
Pedroni in Table 4 for BRIC, two out of the four panel-based
statistics reveal evidence of panel cointegration among the vari-
ables at a 1% level of significance. Additionally, two of the three
group test statistics reveal evidence of panel cointegration at a 1%
level of significance. In sum, four of the seven tests suggest that
there is panel cointegration among the variables in Eq. (1). The Kao
test also suggests panel cointegration at a 1% level of significance. In
addition, the Johansen Fisher test suggests the existence of three
cointegrating vectors at a 5% or better level of significance. Overall,
there is strong statistical evidence in favor of panel cointegration
among emissions, energy consumption, FDI, GDP and GDP2 for BRIC
countries. Evidence of cointegration among variables also rules out
the possibility of the estimated relationship’s being “spurious”. The
panel cointegration equation can be written as
LCO ¼  6:181 þ 1:035LENG þ 0:041FDI þ 1:263LGDP
ð0:007Þ* ð0:003Þ* ð0:148Þ*
 0:112LGDP2 ;
ð0:010Þ*
where the numbers in parentheses denote standard errors, and *
indicates 1% level of significance. The system’s estimated R2 value is
0.999. Therefore, our results support the EKC hypothesis in the case
of the BRICs.
The results in Eq. (4) show that all variables have the expected sign
and are statistically significant at the 1% level. For BRIC unbalanced
panel data, the long-run panel elasticity of emissions with respect to
energy consumption, is above unity (1.035), indicating that for every
1% increase in per capita energy consumption, the per capita
emissions are increasing by 1.035%. Result indicates that a 1% increase
in FDI increases per capita emissions by 0.041%. The panel elasticity of
per capita emissions with respect to income in the long-run can be
formulated as vLCO=vLGDP ¼ 1:263  0:224  LGDP. The result
implies that the turning point of the EKC occurs at an income level of
5.638 (¼1.263/0.224, in logarithms). Similar to the findings by Ang
[24], Tamazian et al. [5] and Apergis & Payne [27], the results are
supportive of the EKC hypothesis in that the level of emissions first
increases with income, stabilizes, and then declines. The elasticity of
GDP on emissions is above unity when GDP is less than 1.174 (¼
(1.263e1)/0.224). Overall, in long-run equilibrium, emissions appear
to be FDI inelastic and energy consumption and GDP are elastic if GDP
is less than 1.174, while GDP is inelastic if GDP is greater than 1.174.
These elasticities suggest a high responsiveness of emissions to
changes in both energy consumption and real GDP in the long-term.
4.3. Panel causality tests
The existence of a panel long-run cointegration relationship
among emissions, energy consumption, FDI, GDP and GDP2
suggests that there must be Granger causality in at least one
direction. The unbalanced panel Granger causality results are pre-
sented in Table 5. The short-run dynamics suggest unidirectional
ð3Þ causality from energy consumption to emissions and from output
to FDI and that there is emissionseFDI, energyeFDI, emis-
sionseoutput and energyeoutput four bidirectional causality
relationships, but there is no causality running from FDI to GDP and
from emissions to energy consumption. According to the coefficient
on the lagged ECT, there exists a long-run relationship among the
variables in the form of Eq. (1), as the ECT is statistically significant.
The coefficients of the ECT are significant in both emissions and FDI
equations, implying that there are two long-run panel causality
links that run from energy consumption, output and FDI to emis-
sions, and from energy consumption, output and emissions to FDI.

Table 3
Results of panel unit roots tests.

Variable Common unit root Individual unit root

LLC Breitung IPS ADF PP

Level 1st diff. Level 1st diff. Level 1st diff. Level 1st diff. Level 1st diff.
LCO 0.433 4.834* 0.397 2869* 0.752 5.376* 5.818 43.984* 7.647 44.253*
LENG 0.148 4.455* 0.156 2.220** 1.606 5.155* 2.966 42.717* 3.756 43.139*
LFDI 0.097 4.617* 1.158 1.770** 2.189 6.499* 1.469 51.939* 8.053 64.480*
LGDP 3.397 2.721* 0.370 3.738* 5.476 3.607* 0.251 29.017* 0.295 26.307*
LGDP2 5.613 1.923** 0.937 4.394* 6.690 2.465* 0.228 20.698* 0.248 22.323*

Note: *, ** and *** indicate the rejection of the null hypothesis at 1%, 5% and 10% level of significance, respectively. The lag lengths are selected using AIC.
 H.-T. Pao, C.-M. Tsai / Energy 36 (2011) 685e693 691

Table 4
Results of panel cointegration tests.

Pedroni test

Test statistics Statistics

Panel y-stat (Weighted Statistic) 1.472
Panel r-stat (Weighted Statistic) 0.689
Panel PP- stat (Weighted Statistic) 5.459*
Panel ADF-stat (Weighted Statistic) 2.942*
Group r-Statistic 1.569
Group PP-Statistic 8.163*
Group ADF-Statistic 2.778*

Kao test
ADF 3.676*
Fisher test
Null hypothesis Maximum eigenvalue Trace
r¼0 17.55* 38.08*
r&1 13.33** 24.08*
Fig. 5. Panel causality relations for BRIC countries.
r&2 12.32*** 14.90**
r&3 4.16 7.79

Note: *, ** and *** indicate the rejection of the null hypothesis at 1%, 5% and 10% hypothesis does not seem to be applicable for BRIC developing
level of significance, respectively. r denotes the number of cointegrating equation.
countries.

The joint Wald F-test results in columns 7e10 of Table 5 imply that
there exist between output and emissions, output and energy
consumption and between emissions and FDI three strong bidi-
rectional panel causal relationships. There is also strong one-way
causality running from output to FDI and from energy consumption
to emissions and to FDI. Fig. 5 summarizes the panel data Granger
causality results of Table 5.
Based on the strong causality results, evidence shows that
both economic and financial development require additional
energy usage, which in turn generates emissions. Additionally,
evidence shows that economic growth can attract FDI because of
the expectation of BRIC’s high income growth and the potentially
vast market. These results are partly consistent with the findings
of Belloumi [22] and of Mahadevan and Asafu-Adjaye [62], who
concluded that there is bidirectional causality between GDP and
energy consumption. The findings also are somewhat consistent
with the finding of Halicioglu [28], who reported evidence of
bidirectional Granger causality between output and emissions in
Turkey. Additionally, the unidirectional strong causality running
from energy consumption to emissions is in line with Zhang and
Cheng [30], but the strong bidirectional causality relationship
between emissions and FDI contradicts the finding of Hoffmann
et al. [37], who found evidence of unidirectional causality for
some group of countries. Furthermore, the finding of strong
unidirectional panel causality running from output to FDI is in
line with the finding of Lee and Chang [63] but differs from that
of Hansen and Rand [64] for developing countries. However,
contrary to the general perception, the test results here show that
FDI does not cause the growth of GDP, the FDI-led-growth
5. Conclusions and policy implications
Because the sole purpose of FDI is to maximize the amount of
profit, investment under such a motive will bring certain negative
effects to the host countries in addition to a positive impact on
economic growth, of which the most important is the impact on the
environment. This paper has thus attempted to estimate the
dynamic relationships between CO2 emission, energy consumption,
FDI and economic growth for the BRICs during the period between
1980 and 2007, except for Russia (1992e2007), using a panel
cointegration framework. The main findings of the results indicate
the following: (1) all series appear to be non-stationary in levels but
stationary in the first differences for logarithmic form, and there
exists a long-run equilibrium relationship between emissions,
energy consumption, FDI and real output for the panel BRIC
countries; (2) CO2 emissions appear to be energy consumption
elastic, FDI inelastic, and GDP elastic if GDP is less than 1.174, with
GDP being inelastic if GDP is greater than 1.174. These elasticities
suggest a high responsiveness of emissions to change in both
energy consumption and output and not in FDI; (3) the results are
supportive of the EKC hypothesis, with emissions increasing with
real output, stabilizing, and then declining; (4) in the short-run,
there exists unidirectional causality from energy consumption to
emissions and from GDP to FDI. Additionally, there are four bidi-
rectional causal relationships that exist between emissions and FDI,
emissions and output, energy and FDI and between energy and
output; (5) there is bidirectional long-run Granger causality
between emissions and FDI, along with unidirectional causality
from energy consumption and real output, respectively, to

Table 5
Results of the panel causality tests.

Depen. Var. Source of causation (independent variables) R2

Short-run Long-run Joint (short-run/long-run)

DLCO DLENG DLFDI DLGDP& DLGDP2 ECT DLCO, ECT DLENG, ECT DLFDI, ECT DLGDP & DLGDP2,ECT
F-statistics t-statistics F-statistics
DLCO e 270.451* 429.597* 161.280* 5.447* e 4526.960* 280.831* 478.956* 0.978
DLENG 1.066 e 3.908*** 12.382* 0.097 0.684 e 1.990 8.813* 0.721
DLFDI 9.099* 13.633* e 8.255* 7.055* 42.397* 31.724* e 16.630* 0.723
DLGDP 5.271** 5.715** 0.004 e 0.488 3.901** 2.892*** 0.126 e 0.901
DLGDP2 7.004** 13.321* 2.867 e 0.818 6.085* 7.003* 1.603 e 0.906

Note: *, ** and *** indicate 1%, 5% and 10% level of significance, respectively.
692 H.-T. Pao, C.-M. Tsai / Energy 36 (2011) 685e693
emissions/FDI; (6) the joint tests indicate that whenever a shock
occurs in the system, four variables would make short-run
adjustments to restore long-run equilibrium, and there are some
strong panel causality relationships among variables.
Based on the above results, these nexuses pose important chal-
lenges to BRIC countries’ policy makers, who need to be aware of the
following long-term trends. To begin with, the finding of strong
bidirectional Granger causality between emissions and FDI implies
that emissions and FDI are jointly determined and affected at the
same time. For the emissions / FDI direction, it seems to support
the pollution haven, and for the FDI / emissions direction, it seems
to support both the halo effect and the scale effect among BRIC
developing countries. There are four interpretations of this result.
First, in the absence of FDI-attracting factors like infra-structure and
skilled labor, developing countries may use lax environmental
regulations to compete in the FDI tournament. Second, innocent
pollution havens may arise when developing countries are less able
to afford costs of implementing and monitoring environmental
regulations. Third, multinationals engaging in FDI will tend to
spread their greener technology to their counterparts in host
countries. Finally, the sheer size of operations of multinationals
operating in these countries, relative to domestic firms, would
contribute to a host nation’s industrial output and significantly add
to the amount of emissions produced. However, the extent of
pollution by the entry of some multinationals may be offset by the
transfer of green technology from other multinationals to these
same countries. Additionally, the unidirectional strong causality
running from output to FDI shows that rapid growth of economic
development and huge developmental potential have attracted
a large amount of FDI. Therefore, these developing countries should
strictly examine the qualifications for foreign investment or to set
appropriate tariff regulations to avoid environmental damage.
Furthermore, emerging countries should actively promote envi-
ronmental protection, through coordinated know-how and tech-
nological transfer with foreign companies, to avoid greater damage
to the environment and consumption of natural resources.
Another important result shows that there is strong bidirectional
causality between output and emissions, whereas unidirectional
strong causality runs from energy consumption to emissions. This
result means that an increase in energy consumption/output brings
about an increase in emissions. Additionally, the finding of bidirec-
tional strong causality between output and energy consumption
implies that energy consumption and output are jointly determined
and affected at the same time. For a panel as a whole, these devel-
oping countries are energy-dependent economies. Therefore,
harmony between energy supply side measures and economic
growth is needed. To avoid a negative effect on economic growth and
reduce emissions, the BRICs should adopt a dual strategy to increase
their investment in energy infra-structure for energy efficiency and
strengthen their energy conservation policies to reduce unnecessary
waste. The above dual strategy policies seem to be an active way to
decrease carbon emissions by reducing both energy demand and
energy intensity among BRIC countries. In the BRICs, the energy
intensity (defined as the amount of energy consumed per GDP) was
22,932.09 Btu/USD in 2007, which was more than the average
energy intensity in both Non-OECD (20,469.07 Btu/USD) and Asian
and Oceanic (13,315.51 Btu/USD) countries and was also more than
the global average energy intensity (9846.835Btu/USD) (EIA).
Higher energy intensity in the BRICs is reflected in inefficient energy
usage in industry as well as in the commercial and household
sectors. This indicates that much improvement needs to be made in
energy efficiency. Therefore, energy efficiency and conservation will
not harm economic growth and reduce emissions.
In summary, for BRIC economies, which are managing energy
demand and FDI, increasing investment both in the energy supply
and in energy efficiency can be adopted to reduce CO2 emissions
and without compromising their country’s competitiveness. At the
same time, efforts must be made to encourage industries to adopt
new technologies to minimize pollution to abide by the recom-
mendations of the Post-Kyoto Protocol.
Acknowledgments
The authors would like to thank anonymous reviewers for their
valuable suggestions and helpful comments which have greatly
enhanced the quality of this paper.
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