Economic growth and carbon causality: A three-step analysis for Hungary

The present study explores the relationship between economic growth, electricity consumption, carbon emissions and urbanization in Hungary over the period of 1974-2014. We use three-step model for testing stationarity, cointegration and causality in VECM framework. First, we employ ARDL bounds testing methodology to investigate the long run relationship among the series in the presence of structural breaks. Secondly, to overcome the issue of different integrated order of variables, we applied Toda-Yamamoto procedure to test causality. Our results indicate the existence of long run relationships. The impact of electricity consumption and urbanization are positive on carbon emissions and statistically significant in the long run. The empirical results show that bidirectional causality is running from electricity consumption to economic growth. We further found evidence in the case of bidirectional causality between carbon emissions and economic growth. The causality analysis validates conservation hypothesis meaning that electricity consumption, economic growth and urbanization Granger cause carbon emissions. We conclude that increasing electricity consumption is an indicator of economy growth in Hungary therefore economic policy and energy policy interrelating coordination are vital for maintaining sustainable development.