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Consumption-based carbon emissions and trade nexus: Evidence

from nine oil exporting countries

Zeeshan Khan, Muhsin Ali, Liu Jinyu, Muhammad Shahbaz,

Yang Siqun

PII: S0140-9883(20)30146-8
DOI: https://doi.org/10.1016/j.eneco.2020.104806
Reference: ENEECO 104806

To appear in: Energy Economics

Received date: 16 December 2019

Revised date: 8 March 2020
Accepted date: 19 May 2020

Please cite this article as: Z. Khan, M. Ali, L. Jinyu, et al., Consumption-based carbon
emissions and trade nexus: Evidence from nine oil exporting countries, Energy Economics
(2018), https://doi.org/10.1016/j.eneco.2020.104806

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© 2018 Published by Elsevier.

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Consumption-Based Carbon Emissions and Trade Nexus: Evidence from nine Oil
Exporting Countries

Zeeshan Khan1 Zeeshan.17@sem.tsinghua.edu.cn, Muhsin Ali2 muhsinpide@gmail.com,

Liu Jinyu1 Liujy5.14@sem.tsinghua.edu.cn, Muhammad Shahbaz3,*
muhdshahbaz77@gmail.com, Yang Siqun1 yangsq@sem.tsinghua.edu.cn

1
School of Economics and Management (SEM), Tsinghua University, Beijing, China
2
Pakistan Institute of Development Economics (PIDE), Islamabad, Pakistan
3
School of Management and Economics, Beijing Institute of Technology, Beijing, China.

*
Corresponding author.

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Abstract

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The relationship between international trade and carbon emissions has been studied
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extensively; nonetheless, consumption-based carbon emissions, which is adjusted for

international trade, have not been studied. This study is an attempt to address the gap by
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using consumption-based carbon emissions adjusted for trade openness in the case of oil-

exporting countries. The effect of international trade is analyzed by treating exports and
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imports separately from 1990 to 2018. The long-run impact of all variables, i.e., exports,
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imports, and gross domestic product (GDP) is higher than the short-run coefficients. The
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empirical evidence, both in the long-run and short-run, confirms the negative effect of
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exports on consumption-based carbon emissions. Furthermore, gross domestic product (GDP)

and imports have a positive and statistically significant impact on consumption-based carbon

emissions both in the short-run and long-run. Policies related to consumption-based carbon

emissions and international trade shall realize the effect of government policies to absorb it

fully by taking approximately two years.

Keywords: Consumption-based carbon emissions; oil-exporting countries; international

trade.

I. Introduction
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The magnitude of international trade is increasing since the last few decades; however, in the

last decade, i.e., from 2005-2015, the level of international trade increased by 62%

approximately. The contribution of international trade has also reached a new level from 23%

in 1960 to 58% as a percentage of total gross domestic product (GDP) in 2017 (World Bank

(WB), 2017). The expansion in international trade is the one important reason that relates

international trade with increasing carbon emissions (Tamiotti, 2009; Heil and Seldon, 2001;

Hasanov et al. 2018). On a broader scale, it is considered that trade brings efficiency in the

economic system; yet, some concerns consider international trade as an apparatus by the

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wealthy economies to reduce their carbon emissions. On the other hand, such reductions in

emissions are expected to be (at least) offset by a rise in emissions in the region(s) where
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goods and services are traded – a phenomenon is known as Carbon–Leakage (Liddle 2018,
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Hasanov et al. 2018). Alternatively, as claimed by the ‘Pollution Heaven Hypothesis’ global
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trade system transfers heavily polluting industries to low-income economies, where pollution

regulations are typically less stringent (Cole 2004)1 ’2 .

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Yet, attention is still given to emissions produced within the sovereign borders of a nation,
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i.e., territory or production-based emissions. Whereas relatively less attention is devoted to

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consumption-based carbon emissions, which is adjusted for international trade (Davis and
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Caldeira 2010, Liddle 2018, Hasanov et al. 2018, Spaiser et al. 2019). Nevertheless, it is

argued that earlier measures are not accurate to assess carbon emissions. For instance, it fails

to comprehend the fact that advanced nations specialize in services and knowledge-based

sectors, which result in lesser carbon emissions compared to industry and agriculture-based

1
The historical experience suggests that over the years of 1990 to 2008, carbon emissions in advanced
economies have stabilized, nevertheless, carbon emissions have doubled in developing econo mies (Peters et al.
2011).
2
However, there is little support for the claim that high carbon emissions industries are being transferred to
developing economies in response to the stringent climate polices of developed economies (i.e. “strong” carbon
leakage); yet there are other reasons that exp lain the expansions of industrial units in these developing
economies (i.e. “weak” carbon leakage), which might undermine the ongoing struggle of regulate the emissions
(Davis and Caldeira 2010).
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economies (Peters et al. 2011, Baker 2018, Jiborn et al. 2018). Similarly, goods that are

consumed by wealthy nations are produced by developing economies, whereas carbon

emissions in the production of such goods are attributed to developing economies (Peters and

Hertwich 2008, Scott and Barrett 2015).

Consequently, it seems that advanced economies are reducing their level of carbon emissions,

as claimed by highly questioned Inverted-U shaped environmental Kuznets curve (Stern et al.

1996). However, they meet their rising demand from developing economies (Hertwich and

Peters 2009; Davis and Caldeira 2010). Therefore, the emissions embodied in consumption

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challenge the validity of claim that with a certain threshold of inco me the level of emissions

fall; because such emissions (consumption-based emissions) could not be separated from the
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rising level of income, which promotes the volume of trade and level of emissions around the
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globe (Steinberger et al. 2013). Therefore, the consumption-based approach is arguably more
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appropriate for covering the entire carbon chain, establishing the responsibility of carbon

stock, and significant to understand the effectiveness of global efforts for mitigating the rising
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level of emissions (Fernández-Amador et al. 2017). Furthermore, comparative analysis

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suggests that trade has a significant impact on consumption-based, while no effect on the
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territory-based emissions (Knight and Schor 2014, Liddle 2018, Hasanov et al. 2018).
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Unfortunately, the prior studies on trade and carbon emissions consider production-based

emissions, while ignoring consumption-based emissions measures (Liddle, 2018).

Additionally, the current study examines the underlying relationship in aggregated trade

settings while overlooking the disaggregated effect of trade, i.e., how separately exports and

imports affect the level of carbon emissions (Hasanov et al. 2018). However, the evidence

shows that exports lower, while imports raise the level of consumption-based emissions (e.g.,

Knight and Schor 2014, Liddle 2018, Hasanov et al. 2018). Furthermore, existing studies on

trade and carbon emissions consider various panels of countries; for instance, OECD (Cole,
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2004), European Union (de Almeida Vale et al. 2016), and a comb ination of developed and

developing economies (Davis and Caldeira 2010, Spaiser et al. 2017, Spaiser et al. 2019,

Peters and Hertwich 2008, Jiborn et al. 2018). However, exclusively ignore the trade–carbon

emissions association in the case of oil-exporting countries. To the best of our knowledge,

only Hasanov et al. (2018) inquired about this dimension. Considering this gap, the main

objective of this study is to examine how the level of trade (imports and exports) affects the

level of carbon emission in the case of major oil-exporting economies.

There are various reasons that support the separate analysis of oil-exporting economies. For

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instance, their large oil reserves result in rapid wealth creation, which allows them to

effectively involve in international trade (Hasanov et al. 2018). As per estimates in 2018, oil
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is the top exporting product in the world and accounted for approximately 5.9% of total
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exported products. Oil-exports contribute a significant portion to the total exports of these
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countries, i.e., Venezuela, Azerbaijan, Bahrain, Kuwait, Oman, Qatar, Russia Federation,

Saudi Arabia, and United Arab Emirates (UAE). As per 2017 estimates, Saudi Arabia exports
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110 & 14.1, Azerbaijan exports 11.7 & 323, Bahrain exports 2.1 US billion dollars’ crude
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petroleum, Oman exports 13.6 & 2.81, Russia exports 96.6 & 58.4, United Arab Emirates
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exports 39.9 & 21.2, Venezuela exports 22.2 & 2.86 Kuwait exports 31.3, 5.68 US billion
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dollars’ crude petroleum and refined petroleum, respectively (Simoes et al. 2011 ).

Similarly, Qatar exports 25.5 US billion dollars’ petroleum gas, 13.4 US billion dollars’

crude petroleum (Simoes et al. 2011). Similarly, high degree connectivity to world

economies makes them vulnerable to external shocks. Thus, policy recommendations in the

panel studies cannot be applied to these economies (Hasanov et al. 2018, Al-Iriani 2006).

Therefore, it seems important to separately examine the panel of oil-exporting economies, for

the relationship between trade and carbon emission.

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As mentioned earlier, the primary objective of this study is to examine the impact of trade on

carbon emissions in the case of major oil-exporting economies. Our panel includes nine oil-

exporting economies; Venezuela, Azerbaijan, Bahrain, Kuwait, Oman, Qatar, Russia

Federation, Saudi Arabia, and United Arab Emirates (UAE). This study contributes to the

existing literature in a number of ways: (i) this study, like Hasanov et al. (2018), exclusively

considers the oil- exporting economies as these economies possess abunda nt oil resources

with low prices for both refined and crude oil products. Furthermore, due to high oil prices,

these countries accumulate high foreign exchange reserves that expand their capacity to

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import. The increasing capacity to import may cause consumption-based emissions to rise

and makes it interesting to empirically test for oil-exporting countries using the most up-to-
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date data set from 1990-2018. The trade and consumption-based carbon emissions
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relationship is tested by treating exports and imports separately. (iii) the present study
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considers the structural break in the data, which is ignored by Hasanov et al. (2018). To

overcome this issue, we employ Carrion- i-Silvestre (2005) and Bai and Carrion- i-Silvestre
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(2009) approach; moreover, we use the Westerlund and Edgerton (2008), Banerjee and
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Carrion- i-Silvestre (2017) approaches which take into account for structural breaks with
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cointegration. The empirical findings of our study suggest that both in the short and long run,
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exports reduce the consumption-based carbon emissions. However, imports and gross

domestic product (GDP) promote consumption-based carbon emissions. Nevertheless, the

long-run magnitudes of all the variables are high than the short-run, which depicts that such

variables' environmental effects transfer more prominently in the long-run.

The remaining part of the study is organized as follows. Section II discusses the literature

review. Section III and IV outline the theoretical framework and data and specification of the

model. The sections V and VI discuss estimation strategy and empirical results and
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discussion. Finally, section VII provides the conclusion and policy recommendation of the

study.

II. Literature Review

Carbon emissions embodied in international trade flows become significant due to the rapid

development and globalization of the economies around the world, where the rising demand

across the borders is supplemented via international trade. There are numbers of studies that

inquire about the impact of international trade on environmental pollution.

For instance, Liddle, (2018a) investigated the effect of trade on consumption-based carbon

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emissions for a large panel of 102 economies from 1990-2013 by using Common Correlated

Effect Mean Group (CCEMG) econometrics approach. The author found that exports
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decreased consumption-based carbon emissions; however, imports and Gross Domestic
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Production (GDP) increased such emissions. Similarly, the author observed that industry
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share and fossil fuel share increased consumption-based carbon emissions. Additionally, in

the case of territory–based emissions, GDP positively and significantly caused emissions,
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while imports and exports negatively but insignificantly affected such emission level.
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Similarly, in another study, Liddle (2018b) considered 20 selected Asian economies and used
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the afore- mentioned time period and methodology. The author observed that international
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trade insignificantly affected territory–based carbon emissions, while it significantly caused

consumption-based carbon emissions. In the case of consumption-based carbon emissions,

the author observed that exports reduced, while, imports, GDP, and fossil fuel consumption

stimulated such emissions. However, industry energy intensity observed to increase territory–

based carbon emissions; in contrast, it reduced consumption-based carbon emissions.

Additionally, Al- mulali and Sheau–Ting (2014) examined the effect of exports and imports

on carbon emissions for 189 developed and developing economies. They applied Panel Fully

Modified Ordinary Least Square (PFMOLS) to check the Bi-Directional Causality between
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Trade–Energy Consumption, Trade–CO2 Emissions, Exports–Energy Consumption, Exports–

CO 2 Emissions, Imports–Energy Consumption, and Imports–CO2 Emissions. Their findings

suggested that for remaining all the regions, except Eastern Europe, there prevailed a positive

relationship between trade variables–energy consumption nexus and between trade variables–

CO 2 emissions nexus.

Al- mulali et al. (2016) investigated the CO 2 drivers in a large panel of developed and

developing economies. They separated the countries on a geographical basis and applied the

Panel Dynamic Ordinary Least Square (PDOLS) and found that trade openness increased

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corban emission in Central and Eastern Europe, South Asia, Americas, and Sub Saharan

Africa, however, reduced emissions in Western Europe. Moreover, their empirical findings
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also suggested that trade openness affects carbon emissions insignificantly in the Middle
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East, East Asia and Pacific, and North Africa sub-samples.
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To check the validity of EKC, Farhani et al. (2014) considered the case of ten MENA

economies by applying Fully Modified Ordinary Least Squares (PFMOLS), Panel Dynamic
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Ordinary Least Squares (PDOLS) and Panel Vector Error Correction Mode l (PVECM). They
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observed that income reduced CO 2 emissions; however, trade openness significantly

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increased CO 2 emissions.
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Similarly, in case of 12 selected MENA economies, Omri et al. (2015) studied the association

between carbon emissions with different economic variables such as economic growth,

financial development, trade openness, urbanization, and energy consumption. They applied

Generalized Method of Moment (GMM) and observed that trade openness increased carbon

emissions in the panel analysis. However, for individuals’ entities, the impact of trade

openness appeared insignificant for 9 out of 12 economies. Moreover, these estimates also

verified the Environmental Kuznets Curve (EKC) with an interrelated relationship between

international trade and economic growth.

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Al Mamun et al. (2014) examined the CO 2 emission in a large panel of developed and

developing economies. They used the data which covered a period over 1980–2009 and

applied the Mean Group (MG) and Pooled MG (PMG) methods. Further, they classified the

countries according to their income level and observed that compared to low-income

economies, the impact of income on emissions remained high in high–income countries. The

authors also observed that trade openness generally exhibited negative impact on emissions in

most of the subsamples; however, appeared statistically significant only for low-income

and high-income OECD economies.

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Shahbaz et al. (2016) also considered a large panel of world economies over the period of

1980–2014. Additionally, they divided the economies according to their development level.
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They formed three samples of economies: high income, middle income, and low-income
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countries, as well as to individual country cases. In the case of aggregate and three samples,
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they observed an inverted U–shaped relationship between trade openness and CO 2 emissions.

Sohag et al. (2017) examined various determinants of CO 2 emissions, such as trade openness,
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economic growth, population growth, and energy use for a large panel of middle-income
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countries over 1980–2012. They employed the MG, Cross–Correlated MG, and Augmented
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MG methods. The authors observed that only in the case of upper- middle- income countries,
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trade reduced the level of carbon emission. However, for the full sample, and lower- middle-

income countries there prevailed no such effect of trade.

Essandoh et al. (2020) investigated the association among foreign direct investment and

international trade with carbon emissions for 52 selected developed and developing countries

by using Pooled Mean Autoregressive Distributed Lags model from 1991–2014. They

observed that in the case of developed countries, international trade decreased carbon

emissions. However, in the case of developing countries, international transactions increased

carbon emissions. Additionally, their analysis suggested that international trade stimulated
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technological diffusion. Whereas, the process resulted in the migration of emissions- intensive

industries to the developing countries from the developed countries. This transfer caused a

rise in emissions in developing countries while a reduction in developed countries.

On the causal relationship between exports and carbon emissions, Michieka et al. (2013)

studied the case of China from 1970–2010 by using Granger causality (GC) and vector

autoregressive (VAR) approaches. Their findings supported a unidirectional causality from

coal consumption to exports. Similarly, they also observed a unidirectional causality from

exports to carbon emissions in the case of China during the selected time period.

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Mrabet and Alsamara (2016) examined the validity of the EKC hypothesis by applying the

ARDL Bound Testing approach in case of one of the major oil-exporting economies, Qatar
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over the period of 1991–2000. They estimated the effect of trade openness on carbon
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emissions and observed that such effect only appeared significant in case of the long-run but
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insignificant in the short-run.

Knight and Schor (2014) examined the effect of economic growth on CO 2 emissions over the
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period of 1991–2008 in the case of 29 high- income countries. They used the territory-based
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and consumption-based emissions approach with a focus on international trade variables

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(imports and exports). They observed that the effect of economic growth is greater for
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consumption-based emissions than territorial emissions. Similarly, they observed that exports

reduced, while imports raised the level of consumption-based emissions. However, these

variables remained insignificant in case of territory-based.

Most recently, Hasanov et al. (2018) considered a panel of nine major exporting economies

from 1995-2013 by applying the Panel Dynamic Ordinary Least Square (PDOLS), Panel

Fully Modified Ordinary Least Square (PFMOLS), Pooled Mean Group (PMG), and

Common Correlated Effect Mean Group (CCEMG) for long-run and Error Correction

Modelling (ECM) for short-run analysis. They found that exports and imports have a
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statistically significant impact of opposite signs on consumption-based CO 2 emissions in the

long-run and short-run.

Driven from the aforementioned literature, the majority of the studies are related to territory-

based carbon emissions. There are various studies that exclusively considered consumption

and territory-based carbon emissions in the analysis. For instance, Liddle (2018a), Liddle

(2018b), Hasanov et al. (2018), and Knight and Schor (2018) studied consumption and

territory-based emissions by using different dimensions, time period, and econometric

approaches. Nevertheless, the Liddle (2018a & b) considered a specific panel of developed

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and underdeveloped economies, Knight and Schor (2014) focused high- income economies,

while, Hasanov et al. (2018) studied oil-exporting countries from 1995-2013.

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However, except Hasanov et al. (2018), none of the studies examined the effect of trade on
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carbon emissions in case of oil-exporting economies. We, like the mentioned study, also
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examine the trade effect on carbon emissions in case of oil-exporting economies. Yet, we

inquire about the issue with some new approach. The study of Hasanov et al. (2018) ignored
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the structural breaks in the data. Nevertheless, in the case of overlooking such important
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characteristics of data, consistent and efficient estimates could not be obtained. Considering
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this issue, we proceed to more robust econometric techniques, i.e. third- generation panel
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methods. These techniques allow us to establish a more robust relationship in the presence of

structural breaks. Besides, these methods provide a detail explanation of structural breaks and

its effect on each country economy.

III. Theoretical Framework:

The theoretical mechanism through which exports and imports along with the gross domestic

product (GDP) affect consumption-based carbon emissions is explained in this section.

Consumption-based carbon emissions cover the final domestic consumption demand of both

government and household with changes in inventory, gross fixed capital formation and also
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incorporate purchases abroad the residents (Wiebe & Yamano, 2016). This measure is

adjusted for trade, cover the overall carbon chain and helps to identify the production of

carbon emissions in one country and its consumption in the others (Peters et al., 2012;

Fernández-Amador et al. 2017). Therefore, the effect of international trade in this study is

measured by taking exports and imports separately.

Based on the theoretical notion, increasing exports provide more goods and services for the

recipient countries to consume and leave less for domestic consumption. Exports cover goods

and services that are produced domestically and consumed by the recipient country.

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Therefore, carbon emissions related to exports shall emit in the recipient country. In contrast,

imports cover goods and services that are produced by the foreign country and consumed
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domestically and shall emit carbon emissions domestically. With increasing exports, it is
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expected that emissions in the host country shall reduce consumption-based carbon emissions
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while increasing imports with increasing consumption in the receiving country shall increase

consumption-based carbon emissions. Besides exports and imports, carbon emissions from
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the production process remain in the host country. (Peters et al., 2012; Liddle, 2018a;
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Hasanov et al., 2018; Liddle, 2018b; Knight & Schor, 2014; Chen et al. 2018).
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From a theoretical perspective, the rise in the level of imports of goods and services are
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related to increasing consumption since it is considered as one of the major components in

the total consumption level of any country and is specifically true in case of oil-exporting

countries. These selected nine oil-exporting countries are mostly developing countries, and

their imports contain a major portion of goods and services, both final and intermediate,

which are consumed by the host countries (oil-exporting countries). This phenomenon is

previously observed by Hasanov et al. (2018), Liddle (2018a & 2018b).

Similarly, gross domestic product (GDP) is a measure of the health of the economy and cover

different components of the economy, i.e., consumptio n, investment, government

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expenditures, and net exports. Since the major portion of gross domestic product (GDP) is

consumption and increasing consumption is positively associated with consumption-based

carbon emissions (Lau et al., 2014; Omri and Kahouli, 2014; Seker et al., 2015). Moreover,

once the income level increases in oil-exporting countries which are developing economies,

there is a possibility that not only the government but also firms as well as households, shall

consume more with a high marginal propensity to consume, causing carbon emissions to

increase (Hasanov et al. 2018).

IV. Data and Specification of Model:

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Based on the theoretical framework, this study uses three covariates as our main exogenous

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variables for dependent variables, i.e., consumption-based carbon emissions per-capita. On

the other hand, territory-based carbon emissions (TCCO 2 ) is referred to as the country-level
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emissions Per-capita. The data for consumption-based carbon emissions and territory-based
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carbon emissions is obtained from Gilfillan et al. (2019) and a united framework convention

on climate change (UNFC, 2019). Exports per-capita, imports per-capita and gross domestic
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product (GDP) per-capita is obtained from World Bank, World Development Indicators (WB,
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WDI, 2018). The general specification for the model is given below as:
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CCO2,i,t = f(EXPORTSi ,t , IMPORTSi ,t , GDPi,t ) (1)

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In Equation-1, the cross-sections are denoted through "𝑖, " i.e., Azerbaijan, Bahrain, Oman,

Qatar, Kuwait, Russian Federation, Saudi Arabia, Venezuela, and United Arab Emirates,

while "𝑡" is for time-period from 1990-2018. The regression form for equation-1 is given

below as:

CCOPC2,it = δ1it + δ2it GDPPCit + δ3it EXPCit + δ4it IMPCit + α𝑖 + φit (2)

Where CCOPC2,it is consumption-based carbon emissions per-capita and defined as emissions

from fossil fuels subtracting exports and adding imports with a unit of one million tonnes of

carbon emissions (mt CO 2 ). GDPPCit is gross domestic product per-capita and defined as the
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value of all the final goods and services within a specified period for a country with a unit of

constant US dollars, 2010. EXPCit is exports per-capita which measures the total exports of

goods and services with a unit of constant US dollars, 2010. IMPCit is imports per-capita

which measures the total imports of goods and services with a unit of constant US dollars,

2010, α𝑖 is cross-section specific term and φit is the error term. TCOPC2 ,it is territory-based

carbon emissions per-capita and defined as emissions related to a country or based on the

physical occurrence of emissions with a unit of one million tonnes of carbon emissions (mt

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CO 2 ).

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The expected signs based on previous discussions and previous literature ( Liddle (2018a),

δ2it =
∂CCOPC2,it
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Liddle (2018b) Hasanov et al. (2018); Lamb et al. (2014) & Fernández-Amador et al. 2017) is

> 0 , the effect of imports on consumption-based carbon emissions is

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∂IMPCit

expected to be positive with varying the magnitude for coefficients based on whether a
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country is net emissions exporter or net emissions importer, while the effect of gross
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domestic product (GDP) is expected to be positive on consumption-based carbon emissions,

∂CCOPC2,it ∂CCOPC2,it
i.e., δ4it = > 0. Moreover, δ3it = < 0 from a theoretical standpoint, the
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∂GDPPCit ∂EXPCit
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effect of exports on consumption-based carbon emissions is expected to be negative with

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different magnitude of coefficients based on whether a country is net emissions exporter or

net emissions importer, which can be simplified as δ2it > 0, δ3it < 0 and δ4it > 0. We have

taken natural logarithm for all the per-capita variables.

V. Estimation Strategy

V.I Unit Root Testing

We begin our analysis by testing cross-sectional dependence (CD) between the units. Testing

cross-section dependence before the unit root process is helpful to use specific unit root tests

from first, second and third-generation tests to deal with cross-section dependence. Different
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factors such as economic and financial integrations, the interdependence of residuals,

different common stocks such as oil price shocks, financial crisis globally, omitted observed

and unobserved common factors and globalization are associated with cross-section

dependence. The issue of cross section-dependence must need to be tackled as if ignored; it

may lead to spurious results, size distortion and bias stationarity as well as cointegration

results (Salim et al. 2017 and Westerlund 2007). To check for the presence of cross-section

dependence issues, we employ the Pesaran (2015) CD test. Once the results of cross-section

dependence are obtained, the second step is to check for stationarity or unit root process of

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panel data. The issue of non-stationarity in the panel data is dealt by many researchers 3 .

Existing literature on non-stationarity in panel data is divided into three main categories, i.e.
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first generation, second generation and third generation panel unit root tests. These categories
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can be further specified on the basis of different issues tackled by each approach, as the issue
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of non-stationarity with homogenous panel is deal by Levin et al. (2002), Choi test (2001),

and Maddala and Wu (1999) and heterogeneous panel by Im, Pesaran and Shin (2003).
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Similarly, Carrion- i-Silvestre et al. (2005) deal with the issue of multiple structural breaks;
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however, it also does not overcome the problem of cross-sectional dependence.

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Unlike Levin et al. (2002) and, Maddala and Wu (1999), the second generation panel unit
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root tests developed by Pesaran (2007), Choi (2006), and Moon and Perron (2012) not only

tackle the issue of heterogeneity but also overcome the problem of cross-section dependence

between units. However, if there is a possibility of structural breaks in the series due to local

or global events, then both first and second-generation fails to perform better and lose power.

In the presence of structural breaks, third-generation panel unit root tests not only deals with

possible structural breaks in panel data but also take into account heterogeneity and cross-

3
Such as Maddala and Wu (1999), Levin et al. (2002), Im et al. (2003), Moon and Perron (2012), Phillips and
Moon (1999) and Pedroni (2004), Baltagi (2005), and Breitung and Pesaran (2008).
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section dependence problems (Bai and Carrion- i-Silvestre, 2009) 4 . This study follows Bai

and Carrion- i-Silvestre (2009) and Pesaran (2007) approaches to deal with the issue of non-

stationarity with cross-section dependence as the presence of cross-section dependence

invalidates the use of first-generation panel unit root tests (Jalil, 2014). Moreover, we also

employ Carrion- i-Silvestre et al. (2005) test to accommodate the e ffect of time dimension

structural breaks for each cross-section.

V.II Cointegration Testing

Once the unit root or stationarity is tested, we employ Swamy’s test (1970) standardized or

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modified version by Pesaran and Yamagata (2008) to check for slope homogeneity or to

check whether there exists heterogeneity in the slope or not. The null hypothesis for the test
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assumes homogeneous and alternative as heterogeneous slope parameters. Due to the
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existence of cross-section dependence, the first generation cointegration approaches by
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Pedroni (2004), Westerlund (2005), McCoskey and Kao (1998), and Larsson et al. (2001) fail

to provide good estimations due to size properties distortion, and even Pedroni (2001) and
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Kao et al. (1999) assume no cross-section dependence among cross-section under

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considerations. In the presence of cross-section dependence, heterogeneity and non-

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stationarity issues in the data, we use heterogeneous estimation methods such as Westerlund
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and Edgerton (2008), Banerjee and Carrion (2017). These methods not only tackle the

mentioned issues but also identify the structural breaks in the presence of cointegration.

Westerlund (2007) incorporates the issue of heterogeneous slopes parameters and cross-

section dependence but does not take into account the effect of possible structural breaks,

which may not be able to lead to rejecting the null hypothesis of no cointegration.

Unlike to first and second- generation tests, Westerlund and Edgerton's (2008) approach not

only deals with cross-sectional dependence, heterogeneous slops, and serially correlated

4
For more details, please see Bai and Carrion-i-Silvestre (2009).
 Journal Pre-proof

errors but also deals with possible structural breaks at different locations for each cross-

section. Another similar approach, which is used in the current study for examining the

cointegrating relationship between variables developed by Banerjee and Carrion- i-Silvestre

(2017) 5 based on Common Correlated Effects Mean Group (CCEMG). This technique deals

with both strong and weak cross-section dependence, non-stationary panel data,

heterogeneity, and parameters that can be estimated consistently in the spurious regression

framework.

V.III Cross-Sectionally Augmented Autoregressive Distributed Lags (CS-ARDL):

f
oo
There are various factors which cause common shocks in the shape of oil prices and global

financial crisis, which may cause the issue of cross-section dependence. This can provide
pr
misleading results if unobserved common factors are correlated with regressors in the model.
e-
The CS-ARDL is feasible to apply when the issue of slope heterogeneity and cross-section
Pr

dependence arises. The CS-ARDL uses dynamic common correlated effects estimator to

overcome these issues (Yao et al. 2019, Coban and Topcu 2013). The starting point of CS-
al

ARDL is given in terms of equation-2 as following:

u rn

𝑊𝑖,𝑡 = ∑𝑝𝐼=0
𝑤
𝛾𝐼,𝑖 𝑊𝑖,𝑡 −𝐼 + ∑𝐼𝑝=0
𝑧
𝛽𝐼,𝑖 𝑍𝑖,𝑡−𝐼 + 𝜀𝑖,𝑡 (3)
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Equation-3 is Autoregressive Distributed Lags (ARDL) model; if we follow equation-7, it

will provide misleading results in the presence of cross-section dependence. Equation-4 is the

extended form of equation-3 by using cross-sections averages of each regressor, which helps

overcome the unfitting inference concerning the existence of the threshold effect caused by

cross-section dependence (Chudik and Pesaran, 2015).

𝑝𝑤
𝑊𝑖𝑡 = ∑𝐼=0 𝛾𝐼 ,𝑖 , 𝑊𝑖,𝑡−𝐼 + ∑𝑝𝐼=0
𝑧
𝛽𝐼,𝑖 𝑍𝑖 ,𝑡−𝐼 + ∑𝑝𝐼=0
𝑥
𝛼′ 𝑖 , 𝐼𝑋̅𝑡−𝐼 + 𝜀𝑖,𝑡 (4)

5
For details, please see Banerjee and Carrion-i-Silvestre (2017).
 Journal Pre-proof

where 𝑋̅𝑡−𝐼 = (𝑊
̅̅̅̅̅̅̅ ̅̅̅̅̅̅̅
𝑖,𝑡−𝐼 , 𝑍𝑖,𝑡−𝐼 ) are the averages of both the dependent variable and independent

variables under consideration, 𝑝𝑤 , 𝑝𝑧 , 𝑝𝑥 indicate lags for each variable. Further, 𝑊𝑖𝑡 is for

dependent variable such as consumption-based carbon emissions per-capita and 𝑍𝑖,𝑡 contains

all the independent variables such as gross domestic product per-capita, exports per-capita

and imports per-capita. Further, 𝑋̅ denotes cross-section averages (not merely including time

dummies or trends) as to avoid cross-section dependence caused by spill-over effects (Liddle,

2018). The CS-ARDL estimates the long-run coefficients from short-run coefficients. The

f
long-run coefficient and the mean group estimator is given as:

oo
∑𝑝𝑧 ̂
𝐼=0 𝛽𝐼,𝑖
𝜋̂ 𝐶𝑆−𝐴𝑅𝐷𝐿 ,𝑖 = 𝑝𝑤 (5)
1−∑𝐼=0 𝛾̂
𝐼,𝑖

The mean group is given as:

pr
e-
𝜋̂̅ 𝑀𝐺 = ∑𝑁
𝑖 =1 𝜋
̂𝑖 (6)
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Short-run Coefficients are estimated as:

∆𝑊𝑖,𝑡 = 𝜗𝑖 [𝑊𝑖,𝑡−1 − 𝜋𝑖 𝑍𝑖 ,𝑡 ] − ∑𝐼𝑝=1 𝑝𝑧 𝑝𝑥

𝑤−1
𝛾𝐼 ,𝑖 , ∆𝐼 𝑊𝑖 ,𝑡−𝐼 + ∑𝐼=0 𝛽𝐼,𝑖 ∆𝐼 𝑍𝑖,𝑡 + ∑𝐼=0 𝛼′ 𝑖 , 𝐼𝑋̅𝑡 + 𝜀𝑖 ,𝑡 (7)
al

where ∆ 𝐼 = 𝑡 − (𝑡 − 1)
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𝜏̂𝑖 = −(1 − ∑𝑝𝑤 𝐼 ,𝑖 ) ( 8)

𝐼=1 𝛾̂

∑𝑝𝑧
u

̂
𝐼=0 𝛽𝐼 ,𝑖
𝜋̂ 𝑖 = (9)
𝜏̂𝑖
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𝜋̂̅𝑀𝐺 = ∑𝑁
𝑖 =1 𝜋
̂𝑖 (10)

For CS-ARDL, similar to the pooled mean group (PMG), the term Error Correction

Mechanism (ECM (-1)) indicates the adjustment speed towards equilibrium or the time it

takes the economy to reach to the equilibrium point.

V.IV Robustness Tests:

In the presence of slope heterogeneity and cross-section dependence, the use of traditional

approaches may provide biased estimation results (Yao et al. 2019, Coban and Topcu 2013).

In the presence of cross-section dependence, slope heterogeneity, and structural breaks, we

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apply Augmented Mean Group (AGM) by Eberhardt and Teal (2010) and Common

Correlated Effect Mean Group (CCEMG) by Pesaran (2006). Moreover, even with non-

stationarity common factors and unobserved common factors, both AMG and CCEMG

perform better for estimation. The CCEMG takes into account time-variant unobservables

with heterogeneous slope parameters and also overcome the issue of identification. It

averages both dependent and independent variables for all cross-sections to remove the spill-

over effect caused by cross-section dependence, not merely including time dummies or trends

(Liddle, 2018). It is robust to both weak and strong factors for limited and infinite numbers

f
oo
with global shocks such oil price shocks, financial crises, and local spillover effects,

respectively (Pesaran and Tosetti 2011, Chudik et al. 2011). The AMG is an alternative
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approach to CCEMG, which not only caters heterogeneity, cross-section dependence and
e-
structural breaks but also include year dummies and deals the unobservable factor, not as a
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nuisance and consider it as a common dynamic process (Eberhardt and Teal, 2010).

VI. Empirical Results and their Discussion

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Table-1 provides the empirical results of Pesaran (2015) cross-section dependence (CD) test.
rn

It is important to address cross-section dependence in the data; otherwise, it may cause bias
u

cointegration and unit root analysis (Churchill et al. 2019, Salim et al. 2017 and, Westerlund
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2007).

Based on empirical findings, the null hypothesis of no cross-section dependence for all the

variables such as CCOPC2 ,it , GDPPCit, EXPCit and IMPCit is rejected at 1%, 5% and 10%

significance levels respectively. This confirms the absence of cross-sectional dependence in

the panel data. We further employed Pesaran (2007), Bai and Carrion- i-Silvestre (2009) panel

unit root tests for checking the stationarity properties of the variable in the presence of cross-

section dependence, heterogeneity and structural breaks.

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Table-2 provides results of panel unit root test with multiple structural breaks, the null

hypothesis of Carrion- i-Silvestre et al. (2005) supports for no unit root problem or stationary

while the alternative hypothesis is for unit root problem or non-stationarity data. Our

empirical results reject the alternative hypothesis for all the variables except for TCOPCit and

CCOPCit which rejects the alternative hypothesis for long-run homogeneous and

heterogeneous variances. However, the first difference for TCOPCit and CCOPCit is

stationary. The number of breaks in each series is up to five. Each obtained structural break is

f
oo
associated with a local or global economic event, which may have a positive or negative

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effect on the economy. Here, we shall mainly discuss the important structural breaks which

are linked with local (within an economy) and global shocks in case of each cross-section.
e-
Structural breaks are divided into different periods; oil prices fall in 1997-1998, rise in oil
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prices in mid-1999, oil price boom in 2002-2008, fall in oil prices due to global financial

crisis, a decline in oil prices for the period of 2013-2015. Sampled cross-sections are all in
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oil-exporting countries, which is affected due to the rise and fall of oil prices in the global
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market. In terms of global oil price shocks, oil price crises of 1997-1998 are found to have a
u

significant effect on most oil-exporting countries (Mabro, 1998). In terms of local shocks or
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shocks within an economy, for Azerbaijan, structural breaks of 1997, 2004-2006, 2009 and

2014 are of great importance. The structural break linked with 1996-1997 is considered as the

recovery period for the economy due to attracted foreign direct investment, signed

agreements between foreign and state oil companies and carried structural reforms. This

paved the way for positive effects on the overall economy (Asian Development report, 2011).

The economy experienced a high growth rate from 2004 to 2006 due to oil production and

exploration with rising oil prices in the global market (Cornell, 2015). In 2009, the economy

collapsed and GDP growth rates fell to its lowest level due to low oil production and global
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financial crises (Ibadoghlu, 2012 and Valiyey, 2011). For Bahrain, 1997 depicts instability in

the economy due to demonstrations, unemployment and low GDP growth (Stork, 1997).

However, the economic reforms of 2000 by King Hamad bin Isa Al-Khalifa helped the

economy to attract foreign direct investment, liberation policies, privatization and

improvement in economic freedom (Karolak, 2012).

In case of Oman, structural break in 1999 turned out to be a major stimulus for the economy,

along with rising oil prices, privatization, liberalization of the economy, focus on attracting

foreign direct investment and then followed with attainment of World Trade Organization

f
oo
(WTO) membership in 2000 are the key factors which lead the economy to a path of high

growth rates. Oman also achieved high export growth starting from 2003 till 2008 due to high
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oil prices but fell again in 2009 because of oil prices decline caused by the global financial
e-
crises (Book, 2000). For Qatar, 1997 turned out to be a major financial stimulus with a large
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amount of foreign direct investment, though the economy faced problem of double-digit

budget deficit which was later on overcome due to rising oil prices in 1999 with an increased
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oil and gas exports, converting to a surplus budget economy from deficit in the previous
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years. Similarly, Qatar also benefited from the rise in oil prices in 2003-2007; however, the
u

economy experienced slower growth rates due to fall in prices in 2012-2014 (Saif 2009,
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Vohra 2017, Ibrahim and Harrigan 2012, The World Factbook, Qatar, 2016). For the Russian

Federation, structural break in 1998 indicates the Russian financial crisis, which had a

negative effect on the economy with lower growth rates, high inflation and rising

unemployment (Cooper, 1999). However, in 2000-2008, economic reforms introduced by

President Putin helped the economy to gain higher growth with doubling per-capita GDP

(Djankov, 2015). The structural break of 1998, Venezuela experienced low economic growth

due to political instability and historically low oil prices in the wake of Asian financial crises.

Political instability and oil strikes in the year 2002 causes to dwindle the economy further.
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However, post-strikes, the economy starts to grow at a higher rate during the period of 2004-

2008, though this rise is considered natural in the majority of the oil- exporting countries due

to the rise in oil prices. Unfortunately, the Venezuela economy never se ttled, as when the

economy starts to grow, it was badly affected by yet another major global shock in the form

of the global financial crisis (Weisbrot, 2007). On a larger scale, global shocks in the form of

oil prices boom and fall were felt by all the major oil-exporting countries6 .

Table-3 presents empirical results by Pesaran (2007), Bai and Carrion- i-Silvestre (2009) unit

f
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root tests in the presence of heterogeneity, cross-section dependence and structural breaks in

the data. The empirical results failed to reject the null hypothesis of unit root at the level for
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Pesaran (2007) and, Bai and Carrion- i-Silvestre (2009) which also take into account the
e-
problem of structural breaks along with cross-section dependence and heterogeneity. Even
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after taking into account the problem of possible structural breaks, the outcomes still failed to

reject the null hypothesis of non-stationarity or unit root in the data only for Bai and carrion-
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i-Silvestre (2009). However, for Pesaran (2007), all the variables are stationary at level.
rn

Considering such an outcome, we apply Bai and Carrion-i-Silvestre (2009) at first-order

u

differencing. Our empirical findings reject the null hypothesis of unit root or non-stationarity
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and accept the alternative hypothesis of stationary or no unit root for all the variables in the

presence of cross-section dependence, heterogeneity and structural breaks. This confirms that

all the variables such as CCO2 PC, TCOPC2,it , IMPC, GDPPC and EXPC are stationary at first

difference or integrated at I(1).

6
For instance, the oil prices boom fro m 2002-2008 helped more than a few oil-exporting economies such as
Saudi Arabia, United Arab Emirates, Oman, Bahrain, Qatar and Kuwait and generated massive revenue and
high economic growth rates (Saif, 2009). Similarly, structural breaks fro m 2012-2014 mainly indicate the effect
of lower oil p rices, in this interval the samp led oil-export ing countries experienced low econo mic growth, low
per-capita growth and low exports per-capita (Simoes et al. 2011).
 Journal Pre-proof

After employing unit root tests and cross-section dependence test, we proceed for employing

the modified version of Swamy’s (1970) slope homogeneity tests proposed by Pesaran and

Yamagata (2008). This method checks whether there exist heterogeneous or homogenous

slope coefficients as assuming homogeneous slope coefficients shall provide misleading

estimation results (Alam et al. 2018). In the case of the null hypothesis, homogenous slope

coefficients shall be assumed, whereas the alternative hypothesis suggests otherwise. Our

empirical results for slope homogeneity are reported in Table-5 indicating the rejection of the

null hypothesis at 1%, 5% and 10% levels, respectively.

f
oo
The empirical results provided in Table-6 for Westerlund and Edgerton (2008) with a null
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hypothesis of no cointegration exist among the variables in the presence of cross-section
e-
dependence, heterogeneity, serial correlation, and structural breaks. The empirical results
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reject the null hypothesis of no cointegration with no breaks, mean shift and regime shift.

This confirms the presence of a cointegrating relationship between CCOPC2,it , GDPPCit ,

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EXPCit and IMPCit . In the case of TCOPC2 ,it there also exists a cointegrating relationship
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between TCOPC2 ,it , GDPPCit , EXPCit and IMPCit and results for territory-based carbon
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emissions are given in Appendix-II.

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The empirical results of Banerjee and Carrion- i-Silvestre (2017) cointegration approach also

confirm the existence of a cointegrating relationship between CCOPC2 ,it , GDPPCit, EXPCit

and IMPCit 1%, 5% and 10% levels of significance for the full sample and each country such

as Azerbaijan, Bahrain, Kuwait, Oman, Qatar, Russian Federation, Saudi Arabia, Venezuela

and the United Arab Emirates. The cointegrating relationship for both Westerlund and

Edgerton (2008), Banerjee and Carrion- i-Silvestre (2017) for consumption-based carbon

emissions, exports, imports and gross domestic product are consistent with the empirical
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findings of Liddle (2018) and Hasanov et al. (2018). Similarly, empirical results of

Westerlund and Edgerton (2008) for TCOPC2,it confirm the cointegrating relationship 7 . Since

the cointegrating relationship between all the variables is confirmed, so we move for

investigating the long run and short-run relationship between consumption-based carbon

emissions and its determinants.

Table-8 provides the empirical results of the cross-sectional augmented autoregressive

distributed lags model (CS-ARDL). The empirical results show that economic growth

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positively affects consumption-based carbon emissions with a coefficient of 0.76%, which is

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significant at 5% and 10%. This notes that a 1% rise in gross domestic product per-capita

causes to increase consumption-based carbon emissions by 0.76%. Similarly, gross domestic

e-
product (GDP) is a measure of the health of the economy and cover different components of
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the economy, i.e., consumption, investment, government expenditures, and net exports. Since

the major portion of gross domestic product (GDP) is consumption and increasing
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consumption is positively associated with consumption-based carbon emissions (Lau et al.,

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2014; Omri and Kahouli, 2014; Seker et al., 2015). Moreover, once the income level
u

increases in oil- exporting countries, there is a possibility that not only the government but
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also firms as well as households, shall consume more, causing carbon emissions to increase

(Hasanov et al. 2018).

Similarly, imports are also positively linked with consumption-based carbon emissions. We

find that a 1% increase in imports causes consumption-based carbon emissions to rise by

0.51%. From a theoretical perspective, the rise in the level of imports of goods and services is

related to increasing consumption since it is considered as one of the significant components

in the total consumption level of any country and is specifically true in the case of oil-

7
Results are provided in Appendix-II.
 Journal Pre-proof

exporting countries. These selected nine oil-exporting countries are mostly developing

countries and their imports contain a major portion of goods and services, both final and

intermediate, which are consumed by the host countries (oil-exporting countries). This

phenomenon is previously observed by Hasanov et al. (2018), Liddle (2018a; 2018b).

Unlike economic growth and imports, exports are negatively associated with consumption-

based carbon emissions with coefficients of -0.68. This unveils that a 1% rise in exports leads

to lower consumption-based carbon emissions by -0.68%. Based on the theoretical notion,

increasing exports provide more goods and services for the recipient countries to consume

f
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and leave less for domestic consumption. These empirical outcomes for cross-sectional

augmented autoregressive distributed lags are similar to Hasanov et al. (2018); Liddle
pr
(2018a); Liddle (2018b) Lamb et al. (2014) & Fernández-Amador et al. (2017) and, Knight
e-
and Schor (2014). It is argued by Hasanov et al. (2018) that oil-exporting countries generate a
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large number of foreign exchange reserves during oil prices boom, which helped them to

import more. Moreover, our empirical findings indicate that imports and exports have
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opposite signs i.e. exports decrease consumption-based carbon emissions, but imports
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increase it.
u

The coefficient for exports is higher than that of imports and it is mainly due to the fact that
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these countries oil-exporting countries and a major share of their exports are fuels. Similarly,

the average ratio of consumption-based carbon emissions to territory-based carbon emissions

is less than one except for the United Arab Emirates 8 . The average ratio for consumption-

based carbon emissions to territory-based carbon emissions less than one shows that most of

these countries are net carbon emissions exporters while only UAE is net carbon emissions

importer. The major shares in exports for these countries is fuel, i.e., fuel contribution in total

exports for Azerbaijan is more than 80%, 38% for Bahrain, 64% for Oman, 85% for Qatar,

8
Average ratios of consumption to territory-based carbon emissions are given in Appendix-I.
 Journal Pre-proof

84.4 for Kuwait, 55% for Russian Federation, 75.9% for Saudi Arabia, 80% for Venezuela

and 48% for United Arab Emirates (UAE). The average ratio of consumption-based to

territory-based carbon emissions for United Arab Emirates (UAE) is greater because the

major portion of her imports are machines (23%), precious metals (21%) and transportation

(11%), (Simoes, 2011).

Another possible reason for a negative association between exports and consumption-based

carbon emissions is that most of the developing countrie s are carbon- intensive compared to

developed countries. It is noted that exports related to the carbon contents of developing

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countries are higher than in developed countries (Afionis, 2017). Since, all the countries are

oil-exporting countries, the major share in these countries exports are crude oil, refined
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petroleum and petroleum gas having China, India, United States of America (USA), South
e-
Korea and Japan are the top importers of petroleum gas, crude oil and refined petroleum
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(Simoes, 2011). The rise in exports reduces carbon emissions in the host country; however, it

is consumed in the form of fossil fuels such as asphalt, gasoline, diesel, petrochemicals and
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kerosene as China and India have a high use of fossil fuel in total energy share (Kibria,
rn

2019).
u

Explaining the role of imports and exports is vital here, as around 23% of the global carbon
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emissions in 2004 had traded from one country to another or through international trade and

percentage is constantly is rising due to globalization (Davis and Caldeira 2010, Afionis

2017). In such scenario looking at the imports composition of sampled countries with a major

portion comes from machinery, transportation and mineral products as Azerbaijan imports

25%, 11%, Bahrain 28%, 17%, Kuwait 27%, 12%, Oman 23%, 16%, Qatar 24%, 22%,

Russian Federation 30%, 14%, Saudi Arabia 21%, 16%, United Arab Emirates 23%, 11%

machines and transportation, respectively, for Venezuela 17% machinery and 22% mineral
 Journal Pre-proof

products (Simoes, 2011), as these are one of the leading factors contribute to emissions

(Edenhofer et al. 2014).

These factors are important to consider because it is the end consumer that matters the most

instead of production for consumption-based carbon emissions (Afionis, 2017). In the case of

territory-based carbon emissions, the relationship between imports, exports and gross

domestic product (GDP) and consumption-based carbon emission is only significant for the

gross domestic product (GDP). These results are valid because, for territory-based carbon

emissions, it is obtained irrespective of the final imports inflow and exports; therefore, the

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results are insignificant. These findings are consistent with previous studies in existing

literature for territory-based carbon emissions (Hasanov 2018, Liddle 2018; Lamb et al.

2014)9 .
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e-
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The short-run results are reported in Table-9 and we find a positive relationship between

economic growth (imports) and consumption-based carbon emissions. In contrast, export

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negatively affects consumption-based carbon emissions. The ECM (-1) shows the adjustment
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speed towards equilibrium or the pace of adjustment, which is -0.647% for CS-ARDL. These
u

findings for economic growth, imports and exports are similar to Hasanov (2018), Liddle
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(2018) and, Knight and Schor (2014). The short-run coefficients for imports, exports and

gross domestic product (GDP) is 0.335%, -0.436% and 0.476%, respectively. The short-run

coefficients are lower than the long-run coefficients and its mainly due to the fact these

sampled countries are developing economies and still growing especially their industrial

development is in progress affecting carbon emissions positively (Uchiyama, 2016).

9
Results can be checked in Appendix-II
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Table-10 shows robustness results obtained from the augmented mean group (AM G) and the

common correlated effect mean group (CCEMG). AMG and CCEMG confirm a negative

association between exports and consumption-based carbon emissions with coefficients of -

0.455 and -0.353%, respectively. On the other hand, there exists a positive re lationship

between imports and consumption-based carbon emissions with coefficients of 0.288% and

0.148% for AMG and CCEMG, respectively. Similarly, gross domestic product (GDP) is

associated positively with consumption-based carbon emissions with coefficients of 0.472%

and 0.366%, respectively. The outcomes from the robustness check support our results

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obtained from cross-sectionally augmented autoregressive distributed lags model (CS-

ARDL). The overall findings from this empirical endeavour is consistent with the outcomes
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as well as explained the concept of consumption-based carbon emissions similar to Peters et
e-
al., (2012); Liddle, (2018a); Hasanov et al. (2018); Liddle, (2018b); Lamb et al. (2014);
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Knight & Schor, (2014) and Chen et al. (2018).

VII. Conclusion and Policy Implications

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This study analyzed the impact of international trade flow, i.e., import and export on
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consumption-based carbon emissions in case of major oil-exporting economies. The study

u

used the Pesaran (2015) test to check the cross-sectional dependency and applied various
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tests, such as Carrion-i-Silvestre (2005), Pesaran (2007), and Carrion-i-Silvestre (2009) to

check the unit root process in the data. Additionally, the study applied the Swamy test (1970)

and Pesaran and Yamagata (2008) to check slope heterogeneity, while relied on Westerlund

and Edgerton (2008), Banerjee & Carrion- i-Silvestre (2017) cointegration techniques to

check the long-run relationship among the variables. The findings of the cointegration

techniques suggested that there exist long-run relationship among the variables.

The estimated coefficients obtained through cross-sectionally augmented autoregressive

distributed lags (CS-ARDL) test confirmed that both in the long-run and short-run gross
 Journal Pre-proof

domestic product per-capita and imports per-capita positively affected, while exports

negatively caused consumption-based carbon emissions for oil- exporting countries. The

findings confirm that in the long-run, exports have a more significant effect on consumption-

based carbon emissions as compared to the short-run results with high coefficient values.

Moreover, the magnitude of exports is higher than imports both in the long-run and short-run

and is mainly due to the fact that these countries net carbon emissions exporters. Based on

findings, this study recommends that in order to reduce the effect of economic growth and

imports on consumption-based carbon emissions, domestic consumption level should be

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targeted, especially those sectors which are more energy- intensive and causing to increase

carbon emissions. Emissions oriented imports should be controlled via reforms that do not
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restrict trade and should only target carbon emissions reduction. The import structure of these
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countries is mostly production machinery and transportation, so these countries should focus
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on importing environment- friendly production machinery, which shall not only reduce the

effect of imports on emissions but also shall help in declining the externality effect caused by
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exports through trade. Policies related to consumption-based carbon emissions and

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international trade shall realize the effect of government policies to absorb it fully by taking
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at approximately two years.

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Appendix-I
List of Sampled Countries
Country ID Countries
1 Azerbaijan
2 Bahrain
3 Kuwait
4 Oman
5 Qatar
6 Russian Federation
7 Saudi Arabia
8 Venezuela
9 United Arab Emirates
Structural Breaks Location for Westerlund and Edgerton (2008):
Countries Mean Shift Regime Shift Breaks
Azerbaijan 1997 2003
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Bahrain 1997 2004

Kuwait 1999 2003
Oman 1999 2005
Qatar 1998 1998
Russian Federation 1998 2000
Saudi Arabia 1998 2003
Venezuela 1998 2002
United Arab Emirates 1997 2002

Carrion-i-Silvestre (2005) Breaks for CCO2-PC:

KPSS
Country Break Years
Bartlett
Azerbaijan 0.088 1997-2003-2007-2010-2013
Bahrain 0.077 1997-2004-2004-2010-2013

f
Kuwait 0.046 1999-2000-2003-2009-2014

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Oman 0.078 1999-2003-2006-2009-2012
Qatar 0.045 1998-2000-2004-2007-2014
Russian Federation 0.064 1998-2000-2004-2009-2013
Saudi Arabia
Venezuela
0.058
0.086
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1998-2000-2003-2007-2011
1998-2000-2003-2008-2013
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United Arab Emirates 0.060 1997-2000-2003-2009-2014

Carrion-i-Silvestre (2005) Breaks for EX-PC:

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KPSS
Country Break Years
Bartlett
Azerbaijan 0.060 1997-2004-2006-2009-2014
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Bahrain 0.054 1997-2000-2009-2012-2015

Kuwait 0.052 1998-2000-2003-2009-2014
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Oman 0.051 1998-2000-2004-2009-2015

Qatar 0.052 1997-2000-2009-2012-2015
Russian Federation 0.052 1998-2000-2009-2012-2015
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Saudi Arabia 0.055 1997-2004-2008-2011-2014

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Venezuela 0.051 1998-2002-2006-2011-2015

United Arab Emirates 0.053 1997-2003-2006-2009-2012

Carrion-i-Silvestre (2005) Breaks for IM-PC:

KPSS
Country Break Years
Bartlett
Azerbaijan 0.140 1997-2000-2003-2009-2013
Bahrain 0.122 1999-2004-2009-2012-2015
Kuwait 0.116 1997-2000-2003-2009-2013
Oman 0.115 1997-2000-2005-2009-2014
Qatar 0.110 1997-2000-2009-2012-2015
Russian Federation 0.106 1998-2000-2009-2012-2015
Saudi Arabia 0.117 1999-2003-2009-2012-2015
Venezuela 0.099 1997-2001-2004-2009-2015
United Arab Emirates 0.122 1997-2000-2003-2009-2015
 Journal Pre-proof

Carrion-i-Silvestre (2005) Breaks for GDP-PC:

KPSS
Country Break Years
Bartlett
Azerbaijan 0.057 1997-2004-2007-2019-2014
Bahrain 0.052 1997-2001-2009-2012-2015
Kuwait 0.052 1996-2002-2005-2008-2011
Oman 0.052 1997-2001-2004-2008-2011
Qatar 0.051 1997-2002-2005-2009-2012
Russian Federation 0.053 1998-2000-2003-2009-2013
Saudi Arabia 0.052 1997-2002-2005-2011-2015
Venezuela 0.052 1999-2001-2004-2008-2011
United Arab Emirates 0.052 1997-2001-2005-2008-2011

Carrion-i-Silvestre (2005) Breaks for TCO2-PC:

f
KPSS

oo
Country Break Years
Bartlett
Azerbaijan 0.058 1997-2003-2007-2010-2013
Bahrain 0.053 1997-2004-2004-2010-2013
Kuwait
Oman
0.054
0.053
pr
1999-2000-2003-2009-2014
1999-2003-2006-2009-2012
e-
Qatar 0.055 1998-2000-2004-2007-2014
Russian Federation 0.054 1998-2000-2004-2009-2013
Saudi Arabia 0.053 1998-2000-2003-2007-2011
Pr

Venezuela 0.054 1998-2000-2003-2008-2013

United Arab Emirates 0.054 1997-2000-2003-2009-2014
al
rn

Average Consumption to territory-based 𝐂𝐎𝟐 Emissions Ratios:

u

Country Ratio Outcome

Jo

Azerbaijan 0.947 Net Emissions Exporter

Bahrain 0.692 Net Emissions Exporter
Kuwait 0.851 Net Emissions Exporter
Oman 0.928 Net Emissions Exporter
Qatar 0.687 Net Emissions Exporter
Russian Federation 0.838 Net Emissions Exporter
Saudi Arabia 0.849 Net Emissions Exporter
Venezuela 0.717 Net Emissions Exporter
United Arab Emirates 1.176 Net Emissions Exporter
Note: Ratios are the author’s calculations.

Appendix-II
Westerlund and Edgerton (2008):
Dependent Variable: Territory-Based Carbon Emissions:
 Journal Pre-proof

Test\Model No Break Mean Shift Regime Shift

𝐙𝛗 (𝐍) -4.006*** -1.367 -2.306
𝐏𝐯𝐚𝐥𝐮𝐞 0.0000 0.914 0.989
𝐙𝛕 (𝐍) -3.032 0.340 0.972
𝐏𝐯𝐚𝐥𝐮𝐞 0.001 0.633 0.835
Note: *, **, *** shows level of significance at 1%, 5% and 10% separately.

Banerjee & Carrion-i-Silvestre (2017) Panel Cointegration:

Dependent Variable: Territory-Based Carbon Emissions:
Countries\Model No Deterministic With Constant With Trend

f
Specification

oo
Full Sample -4.92** -5.72** -5.66**
Azerbaijan -2.69** -4.62** -4.58**
Bahrain -6.39** -6.37** -6.58**
Oman
Qatar
-5.22**
-4.14**
pr -5.76**
-4.94**
-5.63**
-4.83**
e-
Russian Federation -3.56** -6.43** -6.27***
Saudi Arabia -7.95** -7.72** -7.58**
Venezuela -5.72** -6.08** -5.83**
Pr

United Arab Emirates -4.63** -4.60** -4.84**

Kuwait -3.94** -4.94** -4.83**
Note: Critical Value (CV) at 5%** and 10% * with constant is -2.32, -2.18 and with trend is -2.92 and -2.82.
al

Cross-Sectionally Augmented ARDL

Short-Run CS-ARDL Results
rn

Coefficients
Dependent Variable
[z-statistics]
(TCO2)
(p-values)
u

-0.254
Jo

EX [-1.27]
(0.205)
0.149
IMP [1.41]
(0.159)
0.633**
GDP [2.26]
(0.024)
-0.865***
ECM [-12.94]
(0.000)
Long-Run CS-ARDL Results
-0.28
EX [-1.26]
(0.208)
IMP 0.175
 Journal Pre-proof

[1.39]
(0.163)
0.730**
GDP [2.04]
(0.041)
CSD-Statistics -2.85***
(p-value) (0.0043)
Note: The level of significance is determined by 1, 5, and 10% indicated through ***, ** and * respectively , [] t-statistics
while () contains P-value.

Robustness Check:
Coefficients AMG Coefficients CCEMG
Dependent Variable
[z-statistics] [z-statistics]
(TCO2)
(p-values) (p-values)

f
-0.140 -0.271

oo
EX [-1.62] [-1.13]
(0.105) (0.258)
0.107 0.181
IMP [1.52]
(0.128)
pr [1.40]
(0.163)
e-
0.606*** 0.560*
GDP [4.16] [1.89]
(0.000) (0.059)
Pr

22.24*** 6.81***
Wald test
(0.0001) (0.0782)
Note: The level of significance is determined by 1, 5, and 10% indicated through ***, ** and * respectively , [] t-statistics
while () contains P-value.
al
u rn
Jo

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Table-1: Cross-Sectional Dependence Analysis

Variable Test Statistics (p-values)
TCOPC2,it -31.086*** (0.000)
CCOPC2,it 31.083*** (0.000)
GDPPCit 31.170*** (0.000)
EXPCit 31.162*** (0.000)
IMPCit 31.164*** (0.000)
Note: T he level of significance is determined by 1, 5, and 10% indicated through ***, ** and * respectively, while () contains P-values.

f
Table-2: Carrion-i-Silvestre et al. (2005) Unit Root Analysis 10

oo
Level I(0)
Variable(s) Break with Variance Test Value
Homogenous 1.644*
TCOPC2,it

CCOPC2,it
Heterogeneous
Homogenous
pr
1.925**
3.423***
e-
Heterogeneous 8.621***
Homogenous 0.166
GDPPCit
Heterogeneous 0.182
Pr

Homogenous 0.407
IMPCit
Heterogeneous 0.430
Homogenous 0.203
EXPCit
al

Heterogeneous 0.221
First Difference I(0)
rn

Homogenous 0.732
TCOPC2,it
Heterogeneous 0.781
Homogenous 0.818
u

CCOPC2,it
Heterogeneous 1.267
Jo

Homogenous -
GDPPCit
Heterogeneous -
Homogenous -
IMPCit
Heterogeneous -
Homogenous -
EXPCit
Heterogeneous -
Note: The level of significance is determined by 1, 5, and 10% indicated through ***, ** and *, respectively.

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Structural breaks for each variables and countries are given in Appendix-I
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Table-3: Panel Unit Root Analysis with & without Structural Breaks
Pesaran (2007)
Level I(0) First Difference I(1)
Variables CIPS M-CIPS CIPS M-CIPS
TCOPC2,it -3.27*** -9.37** - -
CCOPC2,it -3.67*** -8.64** - -
GDPPCit -2.51** -8.39** - -
IMPCit -2.61** 6.96* - -
EXPCit -2.56** -6.65* - -
Bai and Carrion-i-Silvestre (2009)
𝑍 𝑃𝑚 𝑃 𝑍 𝑃𝑚 𝑃

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TCOPC2,it

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0.550 1.102 24.61 -2.17** 5.60*** 51.61***
CCOPC2,it 1.086* 0.892 23.25 9.49*** 10.36*** 80.18***
GDPPCit 3.35*** -0.556 14.66 -1.69** 1.37* 26.23
IMPCit
EXPCit
1.065
0.215
0.653
-1.389*
21.91
9.66
-2.03**
-2.71***
pr
6.36**
11.20***
56.17***
85.19***
Note: The level of significance is determined by 1, 5, and 10% indicated through ***, ** and * respectively. For Bai &
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values (CV) for P are 56.06, 48.60 and 44.90, separately.
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Table-5: Slope Heterogeneity Analysis

Dependent Variable: CCOPCit
Statistics Test value (P-Value)
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Delta tilde 14.199*** (0.000)

Delta tilde Adjusted 15.554*** (0.000)
Dependent Variable: TCOPCit
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Delta tilde 16.649*** (0.000)

Delta tilde Adjusted 18.238*** (0.000)
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Note: T he level of significance is determined by 1, 5, and 10% indicated through ***, ** and * respectively, while () contains P -value.
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Table-6: Westerlund and Edgerton (2008) Panel Cointegration Analysis 11

Westerlund and Edgerton (2008)
Test No Break Mean Shift Regime Shift
Zφ (N) -3.45*** -3.29*** -3.12***
Pvalue (0.000) (0.000) (0.001)
Zτ (N) -3.34*** -3.38*** -3.59***
Pvalue (0.000) (0.000) (0.000)
Note: *, **, *** shows level of significance at 1%, 5% and 10% separately while () contains P-value.

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Structural breaks for both mean shift and regime shift are provided in Appendix-I.
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Table-7: Banerjee and Carrion-i-Silvestre (2017) Cointegration Analysis 12

No Deterministic
Countries\Model With Constant With Trend
Specification
CCE Full Sample -4.92** -5.72** -5.66**
Azerbaijan -2.69** -4.62** -4.58*
Bahrain -6.39*** -6.37** -6.58**
Kuwait -3.94** -4.94** -4.83**
Oman -5.22** -5.76** -5.63**
Qatar -4.14** -4.95** -4.84**
Russian Federation -3.56** -6.43** -6.27**
Saudi Arabia -7.95** -7.72** -7.58**
Venezuela -5.72** -6.08** -5.83**

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United Arab Emirates -4.63** -4.60** -4.84**

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Note: Critical Value (CV) at 5%** and 10% * with constant is -2.32, -2.18 and with trend is -2.92 and -2.82.

Table-8: CS-ARDL Long Run Analysis

Long-Run CS-ARDL Results
Dependent Variable
pr Coefficients
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[z-statistics]
(CCO2)
(p-values)
-0.683*
Pr

EX [-1.78]
(0.075)
0.512**
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IMP [2.28]
(0.023)
rn

0.769***
GDP [4.96]
(0.000)
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CSD-Statistics 0.01
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(p-value) (0.9950)
Note: The level of significance is determined by 1, 5, and 10% indicated through ***, ** and * respectively , [] t-statistics
while () contains P-value.

Table-9: Short Run Analysis using Cross-Sectionally Augmented ARDL (CS-ARDL)

Coefficients
Dependent Variable
[z-statistics]
(CCO2)
(p-values)
-0.436*
EX [-1.71]
(0.087)
0.335**
IMP [2.15]
(0.032)
GDP 0.476***

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Results for first and second generation cointegration tests are given in appendix.
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[4.96]
(0.000)
-0.647***
ECM(-1) [-15.31]
(0.000)
Note: The level of significance is determined by 1, 5, and 10% indicated through ***, ** and * respectively, [] t-statistics
while () contains P-value.
Table-10: AMG & CCEMG Test for Robustness Check:
Coefficients AMG Coefficients CCEMG
Dependent Variable
[z-statistics] [z-statistics]
(CCO2 )
(p-values) (p-values)
-0.455** -0.353***
EX [-2.23] [-4.08]
(0.026) (0.000)
0.288** 0.148*

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IMP [2.17] [1.78]

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(0.030) (0.074)
0.472*** 0.366***
GDP [2.78] [2.74]

Wald test
(0.005)
18.06***
pr (0.006)
27.34***
e-
(0.0004) (0.0000)
Note: The level of significance is determined by 1, 5, and 10% indicated through ***, ** and * respectively, [] t-statistics
while () contains P-value.
Pr

Figures
Figure-1: Consumption-Based Carbon Emissions:
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Figure-2: Territory-Based Carbon Emissions:

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Highlights

1. We examine the effect of international trade on consumption-based carbon emissions

for Oil-exporting countries from 1990-2018.

2. Our findings suggest that exports decrease consumption-based carbon emissions,

while imports and gross domestic product increase consumption-based carbon

emissions.

3. The long-run coefficients are higher than the short-run coefficients.

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4. Policies related to consumption-based carbon emissions and international trade shall

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realize the effect of government policies to absorb it fully by taking approximately

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Credit Author statement

Zeeshan Khan: Conceptualization, Methodology, Software

Muhsin Ali: Introduction and Literature Review

Liu Jinyu: Theoretical Review

Muhammad Shahbaz: Reviewing and Editing

Yang Siqun: Supervision

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