Keywords: fossil fuels, non–fossil energy, economic growth, unit root tests, cointegration, Granger causality, fossil fuel consumption, GDP, gross domestic product
Causal relationship between fossil fuel consumption and economic growth in the world
Fossil fuels are major sources of energy, and have several advantages over other primary energy sources. Without extensive dependence on fossil fuels, it is questionable whether our economic prosperity can continue. This paper analyses cointegration and causality between fossil fuel consumption and economic growth in the world over the period 1971 to 2008. The estimation results indicate that fossil fuel consumption and GDP are cointegrated and there exists long–run unidirectional causality from fossil fuel consumption to GDP. This paper also investigates the nexus between non–fossil energy consumption and GDP, and shows that there is no causality between the variables. The conclusions are that reducing fossil fuel consumption may hamper economic growth, and that it is unlikely that non–fossil energy will substantially replace fossil fuels. This paper also examines causal linkages between the variables using a trivariate model, and obtains the same results as those from the bivariate model.