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THE JOURNAL OF ENERGY

AND DEVELOPMENT

Mohamed Arouri, Muhammad Shahbaz,


Rattapon Onchang, Faridul Islam,
and Frdric Teulon,

Environmental Kuznets Curve in Thailand:


Cointegration and Causality Analysis,
Volume 39, Number 2

Copyright 2014

ENVIRONMENTAL KUZNETS CURVE IN THAILAND:


COINTEGRATION AND CAUSALITY ANALYSIS
Mohamed Arouri, Muhammad Shahbaz, Rattapon Onchang,
eric
Teulon*
Faridul Islam, and Fred

lobal warming has become a major international concern. Recent evidence


points to increased carbon dioxide (CO2) emissions, which are blamed for

*Mohamed Arouri is a Researcher at EDHEC Business School, France. His research areas are
energy economics and risk management. The authors publications have appeared in Journal of
Banking & Finance, Journal of Macroeconomics, Energy Economics, Journal of International
Money and Finance, Ecological Economics, Manchester School, Journal of Energy and Development, Macroeconomic Dynamics, and Applied Economics, as a sampling.
Muhammad Shahbaz is an Assistant Professor in the Department of Management Science,
COMSATS Institute of Information Technology, Lahore, Pakistan. His research areas are development and energy economics. The authors publications have appeared in Energy Policy,
Energy Modelling, Energy Economics, Renewable and Sustainable Energy Reviews, Energy: The
International Journal, The Renewable Energy-Journal, and Defense and Peace Economics.
Rattapon Onchang is an Assistant Professor at the Department of Environmental Science,
Faculty of Science, Silpakorn University, Thailand. His research areas are pollution, climate change,
and environmental and natural resource management. The authors publications have appeared in
Environmental and Natural Resource Journal, Journal of Environmental Sciences, and The Journal
of Energy and Development, as a sampling.
Faridul Islam is a Professor and Chair of the Department of Economics at Morgan State
University. His research areas are development and energy economics. The author has published in
Economics Letters, Empirical Economics, Journal of Economic Education, Journal of Asian
Economics, Economic Change and Restructuring, The International Trade Journal, International
Journal of Social Economics, and Indian Economic Review.
Frederic Teulon is the Executive Head of Research at IPAG Business School (Paris, France). His
research areas are international economics, energy economics, and financial markets. The authors
publications have appeared in Energy Policy, Economic Modelling, International Economics,
Review of Accounting and Finance, Journal of Applied Business Research, and The Journal of
International Financial Markets, Institutions & Money.
The Journal of Energy and Development, Vol. 39, Nos. 1 and 2
Copyright  2014 by the International Research Center for Energy and Economic Development
(ICEED). All rights reserved.

149

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warming. In response to tackling this issue, several countries have committed to


reducing CO2 emissions at national levels. On an international scale, such awareness has led to the signing of the Kyoto Protocol, which mandates lowering CO2
emissions to a certain level by the signatories. Unfortunately, the protocols first
commitment period to reduce emissions expired at the end of 2012; while the protocol was amended to accommodate the second commitment period (20132020),
this has not entered into legal force. Over the past decade, Thailand, a developing
country in East Asia, has been facing a mounting challenge as it tries to contain
CO2 emissions and at the same time pursues sustainable economic growth.
The Thai economy is primarily exports driven. The trade balance in 2010 was
342.3 billion baht.1 This was more than twice the average 154.9 billion baht during the
entire decade of 2001 to 2010.2 This reflects the significance of exports on Thailands
economic growth. Between 2002 and 2010, Thai gross domestic product (GDP) almost doubled from 5,450.6 to 10,104.8 billion baht. In the 1990s, Thailand suffered
a severe economic collapse due to the 1997 Asian financial crisis. Following that,
imports of raw materials and capital have grown in step with GDP. Additionally, some
other bright spots on Thailands economic horizon have been the narrowing of the
saving-investment gap, a decline in the ratio of public debt to GDP, and improvements
in the current account balance. However, the nations recovery was very short-lived.
Thailand witnessed significant political instability in 2006. As a result, the economy suffered further, compounded by the global financial meltdown. Exports dropped
substantially by 10 percent. The deep recession forced the Thai government to implement various emergency rescue packages to restore the economy. In addition, the
global food and energy crises from 20082010 took its toll and even forced a revision
in the countrys 10th National Economic and Social Development Plan (20072011).
In sum, national and global economic instabilities have had immense impacts on
Thailands economic performance over the past decade (20012010). The 11th
National Economic and Social Development Plan (20122016), which is under
preparation, places a high priority on economic stability and emphasizes the development of the countrys self-reliance and resilience to external factors.3
Economic growth requires higher energy consumption, which, in turn, boosts
carbon emissions. From 2002 to 2010, Thailands total amount of energy consumption in terms of petroleum sales rose from 30.7 to 33.7 million liters.4 The
largest offender was the energy sector, which contributed about 70 percent of the
total 229 million tons of CO2 equivalent in 2000 and was the key emissions source
in 2004 (accounting for 78 percent of the 263 million tons of CO2 equivalent).5
Given the need for economic growth, the Thai government is exploring realistic
approaches to meet the standards for a low-carbon society. In the same vein, the
government is negotiating a new framework under the United Nations Framework
Convention on Climate Change (UNFCCC) and the Kyoto Protocol. Currently,
Thailand has crafted its 20-year (20112030) energy conservation plan in which
the energy intensity, measured by energy use per unit of GDP, will be reduced

THAILAND: THE ENVIRONMENTAL KUZNETS CURVE

151

from 16.2 kilo-tons of oil equivalent (ktoe)/billion Thai baht in 2005 to 12.1 ktoe/
billion Thai baht by the end of 2030that is a 25 percent decline. This will result
in a reduction of overall CO2 emissions by 976 million tons.6 The target is to
reduce the use of fossil fuels and CO2 emissions.
Urbanization plays a critical role in energy consumption and, thus, CO2 emissions.7 Over the past decade, population growth in Thailand has slowed. The total
Thai population is projected to increase from 63.4 million in 2008 to 71 million by
2028. The share of urban population relative to the total population also has increased as a result of economic growth, especially in the industrial areas, which
have become the centers of economic growth.8 This has contributed further to the
acceleration of urban population growth and the expansion of cities. It is forecasted
that approximately one-half of the Thai population will move to urban areas during
the next 50 years.9 Per-capita income in Thailand is still relatively low. The Thai
government likely will have to exert significant efforts to boost economic growth in
order to meet the needs of an exploding urban population. Moreover, a higher urban
population has implications for energy use and, similarly, on the environment.
S. Hossain investigated the dynamic causal relationships among carbon dioxide
emissions, energy consumption, economic growth, trade openness, and urbanization
for a panel of nine newly industrialized countriesnamely, Brazil, China, India,
Malaysia, Mexico, Philippines, South Africa, Thailand, and Turkey.10 The results
found that over time higher energy consumption in the panel of newly industrialized
countries gives rise to more CO2 emissions; subsequently, our environment will be
polluted more. The findings further suggest that variables such as trade openness
and urbanization have significant and negative impacts on carbon emissions. P. K.
Narayan and S. Narayan tested the environmental Kuznets curve (EKC) hypothesis
for 43 developing countries using both time-series and panel data estimation
techniques.11 They find that only data for the Middle Eastern and South Asian panels
show emissions are lower in the long run compared to the short run, implying that
CO2 emissions have fallen with a rise in income. A. Kukla-Gryz analyzed the
impact of economic growth and international trade on the level of air pollution by
using the estimation of the structural equation model with two factors describing the
structure of economic activity and air pollution intensity.12 The results suggest that
in developing countries, both international trade and per-capita income lead to
changes in the structure of economic activity andas a consequenceto an increase in air pollution. In addition, results indicate that the impact of economic
growth on air pollution intensity in the developing countries occurs through the
change of the structure of economic activity.
Although there are a number of studies that examined the existence of EKC for
Thailand, e.g., S. Hossain, P. K. Narayan and S. Narayan, and A. Kukla-Gryz, all
of the research incorporated Thailand only among a set of comparative countries.
This shows that applications devoted to Thailand and use single country-specific
time series of multiple causalitieseconomic growth, energy consumption,

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urbanization, international trade, and CO2 emissionsseem not to have been carried
out. Therefore, this study contributes to the existing energy literature in four ways:
(i) it is the first comprehensive effort to explore the relationship among economic
growth, energy consumption, and CO2 emissions by incorporating trade openness
and urbanization in a CO2 emissions function for the case of Thailand; (ii) we
apply the Zivot-Andrews (ZA) structural break unit root test to assess the order of
integration of the variables; (iii) a dummy is used to accommodate structural
breaks while applying the autoregressive distributed lag (ARDL) bounds methodology testing the long-run relationship between the variables; and (iv) the vector
error-correction model (VECM) is used to detect the direction of causality between the variables. Our results found cointegration between the variables and the
EKC exists for Thailand, which is confirmed further by unidirectional causality
running from economic growth to CO2 emissions.
In the next section we will review the relevant literature, which will be followed by
an explanation of the modeling and estimation strategy. We then present the interpretations of our results and end by offering our conclusions and policy implication.

Review of Literature
As an outgrowth of the literature on the links among energy consumption,
economic growth, and environmental degradation, the environmental Kuznets
curve has gained significant popularity. The EKC relationship posits that as
economic growth rises (measured by per-capita income), at the initial stage energy
pollutants increase; but, after a certain threshold income has been reached, pollutants start falling. This produces an inverted U-curve. Researchers have examined the validity of EKC both for individuals as well as for groups of nations. The
conceptual framework owes much to the work of G. Grossman and A. Krueger.13
Since then, a burgeoning literature has emerged.14 Despite this, no clear consensus
has occurred. Using cross-national panel data, T. Selden and D. Song examined
the relationship between economic growth and environmental degradation.15 They
considered four air pollutants: particulate matter, sulfur dioxide, nitrogen oxides,
and carbon monoxide. They discovered an inverted-U relationship between emissions and per-capita GDP.
M. Cole et al. examined the relationship between per-capita income and a wide
range of environmental indicators using cross-country panel data to test for the
existence of the EKC.16 The results suggest that EKC is found for local air pollutants even as indicators with a more global or indirect impact either increase
monotonically with income or else have predicted turning points at high per-capita
income levels. These findings offer valuable insight for crafting sustainable environmental policy. The inverted-U relationship between economic growth and
CO2 emissions estimated from panel data need not hold for specific individual

THAILAND: THE ENVIRONMENTAL KUZNETS CURVE

153

countries over time.17 They found that the time patterns for air pollutants and CO2
emissions correlate positively with economic growth and that emissions reduction
requires structural and technological changes in the economy. They point out that
sustainable growth implies the rate of economic growth, which does not further
aggravate pollution. Concern about climate change has prompted several analysts
to examine the relationship between economic activity and energy consumption
and/or carbon emissions, e.g., F. Halicioglu, and N. Apergis and J. Payne.18 D.
Holtz-Eakin and T. Selden were the first to explore the relationship between
economic growth and CO2 emissions.19 Estimates derived from global panel data
(130 countries) suggest a diminishing marginal propensity to emit CO2 as GDP per
capita rises. The relationship exhibited a monotonic, not inverted-U, type.
Various studies investigated the relationship among economic growth, energy
consumption, and CO2 emissions and confirmed the existence of the environmental
Kuznets curve. For example, H. Pao and C. Tsai for Brazil, Russia, India, and
China; I. Ozturk and A. Acaravci for Turkey; A. Acaravci and I. Ozturk for Europe;
M. Nasir and F. Rehman and M. Shahbaz et al. in Pakistan; H. Iwata et al. in 28
developed and developing countries; B. Saboori et al. in Indonesia; B. Saboori et al.
in Malaysia; M. Shahbaz et al. for Romania; and A. Tiwari et al. for India, validated
the presence of the EKC.20
Many of the earlier studies of EKC applied bivariate models in the case of
Thailand and, thus, potentially suffer from the problem of omitted variables bias.
D. Stern pointed out that the EKC results have a very flimsy statistical foundation.21
In particular, he argues that a new generation of decomposition and efficient frontier
models might help disentangle the true relations between the series, which may even
lead to the demise of the EKC. Contemporary approaches that have succeeded in
avoiding the pitfalls include cointegration and Granger causality within a multivariate framework. With the advent of alternative statistical models like the autoregressive distributed lag procedure (ARDL), the research has been extended to
several nations. The models have been implemented for both individual and groups
of developing countries.

The Data, Modeling, and Methodology


Data for the study cover the period of 19712010 and have been taken from the
World Banks world development indicators.22 The series include: energy consumption (kilograms of oil equivalent) per capita, real GDP per capita, trade openness
[(exports + imports)/GDP] per capita, urbanization per capita, and CO2 emissions (in
kt) per capita. We follow the empirical models of J. Ang, U. Soytas et al., A. Jalil and
A. Mahmud, F. Halicioglu, and M. Shahbaz et al.23 We extended their work by incorporating urbanization. Its inclusion appears well justified on theoretical ground for
the EKC relationship in the case of Thailand. The general form of the equation is:

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Ct f Yt ; Yt2 ; Et ; Tt ; Ut :

We use a non-linear functional form (in variables) to specify the relation. All series are
transformed into logarithms. The estimable equation, thus, takes the following form:
lnCt b1 bY lnYt bY 2 lnYt2 bE lnEt bT lnTt bU lnUt mt

where, C refers to carbon emissions per capita; E is energy consumption per capita;
Y and (Y2) refer to real GDP per capita and its square, respectively; T is trade
openness per capita; U is urban population as a share of the total population; and
m is a random error term, obeying the standard assumptions. The EKC hypothesis
requires that bY > 0 and bY2 < 0. We expect energy use to increase pollutants, bE > 0.
The sign of the coefficient of T can go either way. If bT < 0, pollution is reduced due
to strict environmental laws and helped by the importation of capital and technology
that is environmentally favorable. G. Grossman and A. Krueger and F. Halicioglu
argue that if bT > 0, then polluting industries in developing economies might be
shifting production that generates more emissions, which would be consistent with
the safe-haven hypothesis.24 Urbanization leads to higher demands for energy and,
thus, environmental degradation. We expect bU > 0.
We use the ARDL bounds test approach to examine cointegration among the
series developed by M. Pesaran et al.25 The ARDL model applies regardless of the
order of integration.26 Most macroeconomic variables are I(1). A. Haug argues that
the ARDL approach for cointegration is preferable because it is better at small sample
properties compared to other methods.27 Also, the unrestricted error-correction model
(UECM) with appropriate lags captures the data-generating process within the
general-to-specific framework.28 An appropriate modification of the orders of the
ARDL model is sufficient to simultaneously correct for residual serial correlation
and endogeneity problems.29 The following UECM is used to examine the long- and
short-run relationships among the series.
Xp
Xq
lnCt a0 aDUM DUM
b
DlnC

d DlnYt
t1
i
i1
i0 i
Xr
X
X
u
v

s DlnYt 2
e DlnEt
v DlnTt
io i
i0 i
i0 i
Xs

f DlnUt ly lnYt ly2 lnYt2 lE lnEt lT lnTt


i0 i
lU lnUt mt

In the first part of equation (3), b, d, e, s, and v capture the short-run parameters, while lC, lY, lY2, lE, lT, and lU capture the long-run relations among
the series and DUM is the dummy variable.30 The hypothesis of no cointegration,
H0: lC = lY = lY2 = lE = lT = lU = 0, is tested against the alternate of cointegration, i.e., Ha: lC 6 lY 6 lY2 6 lE 6 lT 6 lU = 0. The cointegration decision is

THAILAND: THE ENVIRONMENTAL KUZNETS CURVE

155

based on the critical bounds tabulated by M. Pesaran et al. against the computed
F-statistic.31 The upper critical bound (UCB) assumes that the variables are
integrated at I(1) and the lower critical bound (LCB) assumes they are I(0). If UCB
is less than the F-statistic, the decision favors a long-run relationship among the
variables. If the F-statistic is less than LCB, there is no cointegration. The decision
about cointegration will be inconclusive if the F-statistic lies between UCB and
LCB.32
After establishing cointegration exists among the series, we turn to test
the direction of causality between the pairs of economic growth, energy consumption, trade openness, urbanization, and carbon emissions. The vector
error-correction method is suitable for causal relations between the variables if
the series are found to be stationary at I(1).33 All the series are endogenous in
the system of VECM, which shows that the response variable is explained both
by its own lags and the lags of independent variables as well as the errorcorrection term and residual term. The VECM for the five variables case can be
written as follows:
Xl
Xm
a
DlnC

a22 DlnYtj
DlnCt a01
11
ti
Xn i1
Xo j0
Xp
2

a
DlnY

a
DlnE

a DlnTts
33
44
tr
tk
r0
s0 55
Xk0
q

a DlnUtu h1 ECTt1 m1 i
u0 66

Xl
Xm
DlnYt b01
b
DlnY

b22 DlnCtj
ti
11
Xn i1
Xo j0
Xp
2

b
DlnY

b
DlnE

b DlnTts
tr
33
44
tk
r0
s0 55
Xk0
q

b DlnUtu h2 ECTt1 m2 i
u0 66

Xl
Xm
2
f
DlnY

f22 DlnCtj
DlnYt2 f01
11
t1
Xn i1
Xo j0

f33 DlnYtk
f DlnEtr
Xk0
Xqr0 44
p

f DlnTts
f DlnUtu h3 ECTt1 m3 i
s0 55
u0 66

Xl
Xm
DlnEt u01
u
DlnC

u22 DlnYtj
ti
11
Xn i1
Xo j0
2

u DlnYtk

u44 DlnEtr
k0 33
Xp
Xqr0

u DlnTts
u DlnUtu h4 ECTt1 m4 i
s0 55
u0 66

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THE JOURNAL OF ENERGY AND DEVELOPMENT

Xl
Xm
DlnTRt d01
d
DlnTR

d DlnCtj
11
ti
i1
j0 22
Xn
X0
2

d DlnYtk
d DlnYtk
k0 33
r0 44
Xp
Xp

d
DlnE

d DlnUtu h5 ECTt1 m5i


55
ts
s0
u0 66

Xl
Xm
DlnUt q01
q
DlnU

q22 DlnCtj
11
ti
Xn i1
Xo j0
2

q DlnYtk
q DlnYtk
k0 33
r0 44
Xp
Xq

q
DlnE

q DlnUtu h6 ECTt1 m6i


55
ts
s0
u0 66

where uit are error terms and assumed to be identically, independently, and normally distributed (N;(iid)). The statistical significance of the lagged error term,
i.e., ECTt1, further validates a long-run relationship between the series. The estimated ECTt1 also shows the speed of convergence from the short-run toward the
long-run equilibrium path. The VECM helps to test the causal relation once series
are found to be cointegrated. In such cases, causality must be present at least from
one direction. Furthermore, the VECM can distinguish between short- and longrun causal relationships and detect causality in the long run, short run, or both.34
A statistically significant t-statistic on an estimated lagged error term, i.e.,
ECTt1, with a negative sign confirms the existence of a long-run causal relation.
Short-run causality is indicated by the joint c2 test on the estimated first differenced lagged independent variables. For example, a significant a22,i 6 0"i implies
that economic growth Granger causes CO2 emissions and causality runs from the
latter to the former. A similar inference can be drawn about other causality hypotheses. Finally, we use the Wald or F-tests to test the joint significance of estimated lagged terms of independent variables and the error-correction term,
which further confirms the existence of short- and long-run causality, known to
measure strong Granger causality.35 In addition to sensitivity analysis, parameter
stability and goodness of fit for the ARDL model are checked by the cumulative
sum of recursive residuals (CUSUM) and the cumulative sum of squares of recursive residuals (CUSUMSQ).
Results and Empirical Discussions
While not necessary, the first step is to find out the order of integration of the
variables prior to applying the ARDL bounds testing for the long-run relationships
between the series. This is needed to insure that none of the series is I(2). In
the literature, various methods are available to test the stationarity properties of
the variables, such as the augmented Dickey-Fuller (ADF) by D. Dickey and
W. Fuller, the Dickey-Fuller Generalized Least Squares (DF-GLS) method by

THAILAND: THE ENVIRONMENTAL KUZNETS CURVE

157

G. Elliott et al., and the Ng-Perron by S. Ng and P. Perron.36 The results of these
tests imply that the variables are integrated at I(1).37 C. Baum points out that these
aforementioned tests may be biased in the presence of structural breaks.38 To
overcome this issue, we use the Zivot-Andrews structural break unit root test.39
The Zivot-Andrews test allows information about one structural break in the series
to have one structural break point. The results are robust with the findings of ADF,
DF-GLS, and Ng-Perron. The results reported in table 1 suggest that the variables
are first difference stationary with intercept and trend, i.e., I(1). This sets the stage
for applying the ARDL bounds testing approach to cointegration for a long-run
relationship among the variables for Thailand over the period 19712010.
The ARDL bounds test statistic is sensitive to the selection of lag length.
H. Lutkepohl documents that dynamic link among the series can be captured if the
proper lag is used.40 The selected lag length of 2, using the Akaike information
criterion (AIC), is reported in table 2.
The next step is to examine a long-run relationship among the variables. The
results of the ARDL bounds testing approach to cointegration are reported in
table 3. Our findings show that the calculated F-statistics, i.e., 11.6357, 28.0861,
and 7.4809, exceed the upper critical bounds at the 1-percent and 10-percent
levels of significance when CO2 emissions, energy consumption, and trade openness are used as predicted variables. Our sample consists of 40 observations
(19712010); thus, the critical values from M. Pesaran et al. are inappropriate.41
As such, we chose to use the lower and upper critical bounds generated by
P. Narayan.42 We find three cointegration vectors and, thus, a long-run relationship
among economic growth, energy consumption, trade openness, urbanization, and
CO2 emissions for Thailand over the study period of 19712010.
Table 1
ZIVOT-ANDREWS STRUCTURAL BREAK UNIT ROOT TEST RESULTS

st

At 1 Difference

At Level
Variable

T-Statistic

Time Break

T-Statistic

Time Break

ln Ct
ln Yt
2
ln Yt
ln Et
ln Ut
ln Tt

2.917(1)
3.726 (1)
3.683 (1)
3.148 (1)
3.381 (0)
3.937 (1)

1990
1988
1988
1989
1988
1976

5.253(0)**
4.876(0)***
4.913 (0)***
6.587 (0)*
7.150 (0)*
7.575 (0)*

1987
1997
1997
1984
1987
1981

* = significance at the 1-percent level; ** = significance at the 5-percent level; *** =


significance at the 10-percent level; C refers to carbon emissions per capita; E is energy consumption
2
per capita; Y is the real GDP per capita, Y is the square of the real GDP per capita; T is trade
openness per capita; U is urban population as a share of the total population; and the lag order is
shown in parenthesis.

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Table 2
LAG LENGTH CRITERIA

VAR Lag Order Selection Criteria


Lag
0
1
2

LogL

LR

FPE

AIC

SC

HQ

236.0789
561.4300
602.0704

NA
530.8359
53.4742*

2.22e-13
5.54e-20
5.02e-20*

12.1094
27.3384
27.5826*

11.8508
25.5284*
24.2212

12.0174
26.6944*
26.3867

* indicates lag order selected by the criterion; LR = sequential modified LR test statistic (each
test at the 5-percent significance level); FPE = the final prediction error; AIC = the Akaike
information criterion; SC = the Schwarz information criterion; HQ the Hannan-Quinn information
criterion; and NA = not available.

In addition to the ARDL approach, we also implemented the Johansen cointegration approach to test the robustness of the long-run relationships. The results
in table 4 show two cointegration vectors, as confirmed by trace test statistics and
maximum Eigen values at the 1-percent and 5-pecent level of significance. This
validates a long-run relationship, which is robust in the long-run results.
We now discuss the marginal impacts of economic growth, energy consumption, trade openness, and urbanization on CO2 emissions in the long run as well as
in the short run. The long-run results reported in table 5 indicate that both linear
and non-linear terms of real GDP per capita confirm an inverted-U relationship
between economic growth and CO2 emissions. The results suggest that a 1-percent
Table 3
AUTOREGRESSIVE DISTRIBUTED LAG PROCEDURE (ARDL)
a
COINTEGRATION ANALYSIS
Variable
F-statistics
Break year
Critical values #
Lower bounds
Upper bounds
2
Adjusted R
F-statistic
a

ln Ct

ln Yt

ln Yt

ln Et

ln Tt

ln Ut

11.6375*
1990
1% level
10.150
11.130
0.9703
19.8202*

1.5483
1988
5% level
7.135
7.980
0.9994
26.0811*

1.5345
1988
10% level
5.950
6.680
0.9994
24.7990*

28.0861*
1989

7.4809***
1976

4.2474
1988

0.9702
19.6792*

0.6410
3.5003**

0.9367
21.7236*

* = 1-percent level of significance; ** = 5-percent level of significance; *** = 10-percent level of


2
significance; C refers to carbon emissions per capita; Y is the real GDP per capita, Y is the square of the
real GDP per capita; E is energy consumption per capita; T is trade openness per capita; U is urban
population as a share of the total population; and the critical values # bounds are from P. K. Narayan,
The Saving and Investment Nexus for China: Evidence from Cointegration Tests, Applied
Economics, vol. 37, no. 17 (2005), pp. 1979990, with unrestricted intercept and unrestricted trend.

THAILAND: THE ENVIRONMENTAL KUZNETS CURVE


Table 4
RESULTS OF JOHANSEN COINTEGRATION TEST
Hypothesis
R=0
R1
R2
R3
R4
R5

159

Trace Statistic

Maximum Eigen Value

161.0758*
81.7760*
44.7516
21.1809
9.0893
0.0072

79.2998*
37.0243**
23.5707
12.0915
9.0821
0.0072

* = 1-percent level of significance; ** = 5-percent level of significance; and *** = 10-percent


level of significance.

rise in real GDP per capita will increase CO2 emissions per capita by 7.2369
percent while a negative sign of the estimate, i.e., 0.3057 of the squared term,
establishes the inverted relationship between CO2 emissions and real GDP per
capita. This evidence confirms that CO2 emissions increase at the initial stage of
economic growth and decline after a threshold point, that is, EKC exists. In other
words, GDP influences the efficient consumption of energy, resulting in a reduction of CO2 emissions. This implies that energy demand-side-management
policies should be launched by applying energy-efficient technology by public
organizations to reduce energy consumption. The use of energy-efficient machines
and appliances helps to accomplish this goal, something that potentially can be
achieved at higher levels of income. These findings are consistent with those of
T. Song et al., F. Halicioglu, M. Fodha and O. Zaghdoud, H. Lean and R. Smyth,
M Shahbaz et al. (2012 and 2013), and A. Tiwari et al.43 The impact of energy
consumption on energy pollutants is positive and statistically significant at the
1-percent level. We find that a 0.6424-percent increase in CO2 emissions is linked
with a 1-percent increase in energy consumption. Energy consumption is a major
contributor to environmental degradation. CO2 emissions have increased from
power generation and industrial sectors that are using more natural gas and lignite/
coal. In 2011, total lignite/coal consumption was 19 million tons, an increase of
5.5 percent from 2010 (based on the heating value); natural gas consumption in
2011 rose by 2.6 percent compared to that in 2010.44 Although air pollution
emissions control technologies for these fuels are in place, the desired reduction
in CO2 emission levels remains unsatisfactory. The dilemma for Thailand is to
balance the needs of economic growth with energy consumption and greenhouse
gas emissions in the long run. It is forecasted that natural gas demand in 2011
(excluding the use of feedstock in gas separation plants) will increase by 6.1
percent compared with that in 2010.

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Table 5
LONG- AND SHORT-RUN ANALYSIS RESULTS

Dependent Variable: ln Ct
Long-Run Results
Variable
Coefficient
Constant
40.3455
7.2369
ln Yt
2
ln Yt
0.3057
ln Et
0.6424
ln Tt
0.1699
ln Ut
2.1404
Short-Run Results
Variable
Coefficient
Constant
0.0201
ln Yt
7.0400
2
ln Yt
0.3005
ln Et
0.4182
ln Tt
0.0962
ln Ut
2.3064
0.6136
ECMt1
2
R
0.7880
2
Adjusted R
0.7456
F-statistic
18.5899*
Diagnostic test
F-statistic
2
x NORMAL
0.0357
2
x SERIAL
1.2763
2
x ARCH
0.7092
2
x WHITE
1.1725
2
x REMSAY
0.7594

Standard Error
7.5585
1.5350
0.0772
0.1634
0.0972
0.4031

t-Statistic
5.3377*
4.7144*
3.9580*
3.9292*
1.7477***
5.3090*

Standard Error
0.0135
3.3750
0.1601
0.1638
0.0728
1.1179
0.1473

t-Statistic
1.4921
2.0859**
1.8763***
2.5525*
1.3219
2.0630*
4.1656*

Prob. value
0.9822
0.2948
0.7046
0.3470
0.4537

* = 1-percent level of significance; ** = 5-percent level of significance; *** = 10-percent level


2
of significance; C refers to carbon emissions per capita; Y is the real GDP per capita, Y is the square
of the real GDP per capita; E is energy consumption per capita; T is trade openness per capita; and U
is urban population as a share of the total population.

We find a positive relationship between trade openness and environmental


degradation. A 1-percent increase in trade openness is expected to increase CO2
emissions by 0.1699 percent, all else remaining the same. One may conclude that
trade openness stimulates economic growth, that is, income per capita, which in turn
impedes environmental quality in Thailand by increasing CO2 emissions. Thailand
has established the Board of Investment of Thailand (BOI) under the Ministry of
Industry to encourage foreign investors to set up operations in the country. This
includes an attractive and competitive package of tax incentives, no foreign equity
restrictions on manufacturing activities or some services, and a waiver of restrictions on land ownership by foreign entities; however, there are no similar

THAILAND: THE ENVIRONMENTAL KUZNETS CURVE

161

incentives to support climate-friendly activities. These findings are consistent with


S. Khalil and Z. Inam for Pakistan and F. Halicioglu for Turkey.45 They reported that
trade openness increases CO2 emissions.
The effect of urbanization on CO2 emissions is negative and statistically significant at the 1-percent level. A 1-percent increase in urbanization lowers CO2 emissions
by 2.1404 percent, while keeping other things constant. Urbanization is a major
contributor to saving the environment from degradation in the case of Thailand.
Urbanization in Thailand has moved hand-in-hand with industrialization. Thailand
has promoted itself as an industrial manufacturing hub in Southeast Asia. As a result,
industrial estates can be found throughout the country expanding into the residential
and commercial areas. A planned urbanization can lower air pollution and greenhouse
gases emissions, especially in the transport sector. Mass public transport can be
helpful. Well-planned, compact cities can induce shorter commute distance.46
The short-run results indicate that the impact of the linear (non-linear) term of
real GDP per capita on CO2 emissions is positive (negative) and it is statistically
significant at the 5-percent (10-percent) level. These findings again confirm the
existence of the environmental Kuznets curve in the short run. The relationship
between energy consumption and CO2 emissions is positive and significant at the
1-percent level. All else the same, a 0.4182-percent increase in CO2 emissions is
linked with a 1-percent use (rise or fall) of energy. The impact of trade openness on
CO2 emissions is positive, but it is not statistically significant. Finally, urbanization
is inversely linked with CO2 emissions. Keeping all other things constant, a 1-percent
increase in urbanization improves the environmental quality by 2.3064 percent at
the 1-percent level of significance. The significance of the lagged error term,
ECMt1, with a negative sign further validates the existence of a long-run relationship among the variables. The results reported in table 5 show that the estimate
of the lagged error term is 0.6136 and it is statistically significant at the 1-percent
level of significance. This suggests that deviations in CO2 emissions from the
long-run equilibrium are corrected by 61.36 percent every year. This implies that
the established long-run relationship between the series is reliable and robust.
We applied the cumulative sum (CUSUM) and the cumulative sum of squares
(CUSUMsq) tests to examine the stability of the long- and short-run parameters.
Based on the results shown in figures 1 and 2, we may accept the hypothesis of
correct specification of the regression model because the plots of CUSUM and
CUSUMsq lie within the critical bounds at the 5-percent level of significance.47 The
graph for the CUSUM test statistics falls within the critical lines, while the statistics
of CUSUMsq test appear to cross the bounds in the case of two years (1984 and
1990), which reflects structural breaks in the series. Between the 1980s and the first
half of the 1990s, the Thai economy experienced a period of rapid economic growth,
hitting a peak of 13.29 percent in 1988. Thailands GDP (constant price) remained
relatively high, 12.19 percent in 1989 and 11.63 percent in 1990 and dropped to
8.11 percent in 1991.48 The period of rapid economic growth along with other

162

THE JOURNAL OF ENERGY AND DEVELOPMENT


Figure 1
PLOT OF CUMULATIVE SUM (CUSUM) OF RECURSIVE RESIDUALS

The straight lines represent critical bounds at the 5-percent significance level.

extenuating factors may have influenced other break points during the period such
as urbanization in 1988, energy consumption in 1989, CO2 emissions in 1990, and
a significant reduction in the incidence of poverty. The number of people living in
poverty decreased substantially from nearly 18 million in 1988 to a little less than 7
million in 1996.49 The average annual rate of change of the urban population between 1985 and 1990 was 2.44 percent.50 The demand for energy in Thailand grew
along with an expanding economy. During the period of rapid economic growth,
energy consumption increased by 8 to 10 percent annually and added to CO2
emission from about 165 teragrams (Tg) in 1990 to 202 Tg in 1994.51
The CUSUM and CUSUMsq graphs are not always dependable, so Y. Leow
suggests that we should apply the Chow forecast test to check for structural breaks
in a series.52 Therefore, we applied the test. The results are reported in table 6 and
indicate no evidence of a structural break in the Thai economy over the period of
19841990. Thus, the long- and short-run parameters are stable and appear reliable for policy-making purposes in Thailand.
VECM Granger Causality Analysis: Given the existence of cointegration among

the serieseconomic growth, trade openness, energy consumption, urbanization,


and CO2 emissionswe now investigate the causal relationship between them.

THAILAND: THE ENVIRONMENTAL KUZNETS CURVE

163

Figure 2
PLOT OF CUMULATIVE SUM OF SQUARES (CUSUMsq) OF RECURSIVE RESIDUALS

The straight lines represent critical bounds at the 5-percent significance level.

Knowledge about the direction of causality between the series can help policy
makers in crafting an integrated and sustainable environmental policy. C. Granger
suggested that if the series are first difference stationary and cointegrated to employ
the VECM.53 The results are reported in table 7.
Table 7 reveals that in the long term, there is bidirectional causality between
CO2 emissions and energy consumption, energy consumption, and trade openness,
and trade openness and CO2 emissions. We find unidirectional causality from
economic growth and urbanization to CO2 emissions. The statistical significance
of ECTt1 implies the speed of adjustment in the trade openness equation is
0.7664 as compared to CO2 emissions and energy consumption equations, which
are 0.6574 and 0.6573, respectively.
Table 6
CHOW FORECAST TEST
Chow Forecast Test
F-statistic
Likelihood ratio

Value

P-Value

0.9193
71.8695

0.6169
0.0000

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Table 7

VECTOR ERROR-CORRECION MODEL (VECM) CAUSALITY ANALYSIS RESULTS


Short Run

ln Ct

ln Yt

4.7830**
[0.0179]

ln Yt

ln Tt

2.7059*** 3.7464**
[0.0871]
[0.0384]

0.8874
[0.4248]

0.8958
[0.4258]

5.4765** -0.6574*
[0.010]
[-3.8751]

3.0029**
[0.0222]

0.8161
[0.4540]

0.2812
[0.7573]

3.8441**
[0.0356]

1.0611
[0.3617]

0.3668
[0.6967]

3.6399**
[0.0416]

4.1918** 3.0008**
[0.0275] [0.0229]

ln Yt

Long
Run

ln Et

ln Ct
Dependent variable

ln Yt

ln Ut

ECTt1

ln Et

1.0491
[0.3657]

0.1160
[0.8909]

0.1568
[0.8557]

0.4417
[0.6480]

0.1054
[0.9004]

-0.6573*
[-3.0071]

ln Tt

0.1286
[0.8799]

1.0231
[0.3746]

1.1403
[0.3364]

0.0479
[0.9533]

0.0132
[0.9869]

-0.7664*
[-2.9441]

ln Ut

0.1047
[0.9010]

0.1154
[0.8944]

0.1086
[0.8975]

0.2746
[0.7622]

3.0177***
[0.0678]

* = 1-percent level of significance; ** = 5-percent level of significance; *** = 10-percent level


2
of significance; C refers to carbon emissions per capita; Y is the real GDP per capita, Y is the square
of the real GDP per capita; E is energy consumption per capita; T is trade openness per capita; and U
is urban population as a share of the total population.

In the short run, the feedback hypothesis is found between economic growth
and CO2 emissions. Urbanization Granger causes CO2 emissions and economic
growth. The unidirectional causality is found from trade openness to urbanization. Overall, the results indicate that unidirectional causality runs from
economic growth (ln Yt and ln Yt2) to CO2 emissions (ln Ct) in the long and the
short run. This lends support to the existence of the environmental Kuznets
curve. These findings are consistent with D. Maddison and K. Rehdanz for
North America; X. Zhang and X.-M. Cheng and A. Jalil and S. Mahmud for
China; S. Ghosh for India; P. Narayan and S. Narayan for developing economies; M. Nasir and F. Rehman and M. Shahbaz et al. for Pakistan; and Tiwari
et al. for India.54
Conclusions and Future Research
This paper examines the existence of EKC for Thailand over the period of
19712010 by implementing the ARDL bounds test approach in the presence of

THAILAND: THE ENVIRONMENTAL KUZNETS CURVE

165

structural break stemming in the series to examine a long-run relationship. The


direction of causality between economic growth, energy consumption, trade openness, urbanization, and CO2 emissions is investigated by employing the VECM
Granger causality approach.
We find that the variables are cointegrated. The results indicate that energy
consumption worsens the environment via increasing CO2 emissions. Trade
openness also increases environmental pollutants, which may be due to the
pollution-haven hypothesis and poor local laws. Conversely, urbanization protects the environment. The existence of EKC suggests that economic growth
initially increases CO2 emissions and then these emissions begin to decline
once a threshold income level is achieved. The causality analysis shows bidirectional causality between energy consumption, trade openness, urbanization,
and CO2 emissions. Economic growth Granger causes CO2 emissions and further reaffirms the presence of ECK in Thailand. CO2 emissions are also
Granger causes of urbanization.
Our study suggests that any overuse of non-renewable energy, i.e., natural gas
and coal/ lignite, contributes to greenhouse gas (GHG) emissions. Therefore, the
Thai government should turn to explore renewable energy sources to sustain
economic growth for the long run while also saving the environment from degradation. Greater focus is needed to adopt energy-efficient and less pollutantemitting technologies to accelerate domestic production and, hence, economic
growth. In the context of trade openness, policy makers should craft policies that
promote climate-friendly investment and, thus help to mitigate the adverse
impact on the environment from CO2 and other greenhouse gas emissions.
Continued urbanization appears to be helping in reducing CO2 emissions,
perhaps due to the utilization of public transport rather than private cars and use
of fuel. The government should further support efficient public and fuel-efficient
modes of transportation. Incentives for the provision of such services, putting
regulations in place and their effective enforcement, along with long-term urban
planning should be targeted.
The use of trade openness and urbanization variables in empirical models
cannot capture the true phenomenon of trade and urbanization. That is why we
need a comprehensive study to investigate the impact of trade on energy
consumption and, hence, on CO2 emissions following G. M. Ghani and M. Cole
and R. Elliott in case of Thailand.55 Similarly, the effect of urbanization on
energy consumption and environmental degradation can be investigated following H. Zhu et al. by applying the semi-parametric approach.56 The impact of
financial development and financial instability (financial crisis) on energy
consumption and CO2 emissions also can be examined in the Thai economy
following M. Shahbaz and H. Lean and later on F. Islam et al. and M. Shahbaz,
respectively.57

166

THE JOURNAL OF ENERGY AND DEVELOPMENT

NOTES
1

1 U.S. dollar = 32.3 baht as of March 2014.

2
Government of Thailand, Ministry of Information and Communication Technology, National
Statistical Office (NSO), Gross National Product, Gross Domestic Product and National Income at
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3

Government of Thailand, Office of Natural Resources and Environmental Policy and Planning
(ONEP), Thailands Second National Communication under the United Nations Framework Convention
on Climate Change (Bangkok: Ministry of Natural Resources and Environment, 2010), p. 102.
4

Government of Thailand, Ministry of Information and Communication Technology, National


Statistical Office (NSO), Gross National Product, Gross Domestic Product and National Income at
Current Market Prices by Economic Activities: 2000 2009.
5
Government of Thailand, Office of Natural Resources and Environmental Policy and Planning
(ONEP), Thailands Second National Communication under the United Nations Framework
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6

Government of Thailand, Ministry of Energy, Energy Policy and Planning Office (EPPO),
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7

I. Martnez-Zarzoso and A. Maruotti, The Impact of Urbanization on CO2 Emissions: Evidence from Developing Countries, Ecological Economics, vol. 70, no. 7 (2011), pp. 1344353.
8
Government of Thailand, Office of Natural Resources and Environmental Policy and Planning
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9

Government of Thailand, Ministry of Interior, Department of Public Works and Town and
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169

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