THE CARBON EMISSIONS IMPACTS OF RENEWABLE ENERGY

CONSUMPTION IN AN OIL-RICH ECONOMY

Javid Aliyev

ABSTRACT

The article examines the influence of alternative energy utlization, per capita real GDP, exports
and imports on consumption-based CO2 emissions in oil-exporting Caucasian country,
Azerbaijan from 1993 to 2019 by employing VECM method. Moreover, Variance Decompostion
(VDC) and Impulse Response (IR) evaluation were also used. The outcomes disclosed that
renewable energy consumption has an insignificant influence on CO2 discharges. This outcomes
are compatible with several research conducted in this sphere. All of these were described in
detail in literature review and results part. The insignificant influence of alternative energy use
on carbon emissions can be explained by the relatively lower scale of renewable energy in
comparison to traditional one. While renewable energy increases, this rise is not material enough
to affect harmful gases emissions significantly. Therefore, there is a necessity to raise the portion
of renewable energy utilization in overall energy use. However, according to VDC, it was found
that CO2 is the most endogenous variable, while GDP, exports and renewable energy
consumption are more exogenous which latter variables can affect the former, Co2 emissions.

Key Words: Renewable Energy, CO2 emissions, VECM, Azerbaijan.

INTRODUCTION

A significant rise in the carbon ejections is one of the dominant and challenging issues of the
modern global nations. Based on the report of World bank, for the last 30 years the aggregate
level of CO2 all over the world grew almost 70% from 1990 to 2018 (World Bank, 2021). This
is an alarming fact on rapidly increasing greenhouse emissions. Taking this situation into
account, Intergovernmental Panel on Climate Change (IPCC) (2018) stated that the overall
temperature in the world could approach 1.5°C from 2030 to 2052 unless this tendency continues
on rising on this pace.

Regarding potential environmental effects, greenhouse gases emission can form several types of
pollution. However, the most remarkable one among them which leads to climate change is air
pollution. (Hasanov et al, 2021) Currently, the rising level of CO2 in the air leads to global
warming and as a result, hazardous effects such as desertification (especially in Africa), floods
(mainly in Indonesia), deforesation, erosion and others emerge in different parts of the world
(Todaro, 2009). These kind of natural problems can affect all sector of the global economy
including health, food security and etc. Realizing the importance of dealing with CO2 and its
outcomes, several steps were taken by countries in Kyoto protocol and Paris agreement with the
objective of decreasing harmful gas ejections. In addition, to avoid harmful consequences of
conventional energy and CO2, United Nations set a goal to shift toward clean and affordable
energy (SDG 7). This goal is among 17 important Sustainable Development Goals of United
Nations. (UNDP, 2021)

Considering the importance of finding ways to reduce greenhouse gas emissions, currently many
researchers are investigating this topic with the intention of discovering potential solutions to
decrease them. However, the measures and policy implications of those investigations should be
implemented in a way that will not detoriorate the quality of life across countries. One of the best
way to reduce CO2 is to shift toward the renewable energy, because it is a good substitute of
conventional energy. The reason behind the claim which states the transition to altenative energy
will cause to reduction in harmful gas drop is that the main sources of renewable energy are solar
and hydorpower that don’t produce any harmful gases to the air. (Zeng et. al., 2017) Therefore,
shifting toward renewable energy could cause to decrease harmful emission level.

Among the world nations, resource rich countries emit more harmful gases and pollute the air
more than the other countries (Saidi et. al., 2015). That’s why, finding ways to lessen CO2
ejections for resource abundant nations will be extremely important. Therefore, in this context,
we analyzed the role of CO2 on alternative energy for Azerbaijan, which is one of the biggest oil
producing country after Russia in the Caucasian region.

Azerbaijan is among big oil exporters for its abundant natural oil resource which was ranked
20th according to its potential oil reserves, while taking 24th place in oil production (barrels per
day)( (Worldometer, 2016). Along with this, it is also rich with its alternative energy potential,
which makes the country a special case for our intended investigation and increase the
uniqueness for our exploration. Considering the fact that in 2002, aggregate air polluting
discharges were 620,000 tons in Azerbaijan, the level of the same indicator has nearly doubled
and surpassed 1,100,000 tons in 2019. Meanwhile, the aggregate air-polluting ejections rose by
almost 81 %, with the average of 4.06 % annual growth rate for the time span of 2002-2019
(SSCA 2021). With regard to the development of the nation from economic perspective, it has
demonstrated a remarkable economic growth starting from 2006. For 1996-2019, the GDP of the
country grew by almost 30 times, from 2,733 million AZN in 1996 to about 82,000 million AZN
in 2019. (SSCA, 2020). However, this improvement in the main economic indicator is not
without any potential tradeoffs and it might lead to significant negative effects on environment of
the nation through different channels. Eventually, emerged environmental detriments could cause
undesirable impacts on individuals, society and overall nature. Therefore, with the purpose of
taking the middle path among the indicators of economic improvement, or more clearly, to
provide and pursue sustainable development, existed sources should be utilized friendly from the
perspective of environment.

Meanwhile, because of the harmful detrimental consequences of traditional energy generation

and use on the environment, as well as the limited yields of traditional energy resources, the use
of renewable energy sources is becoming increasingly necessary. (Kravets, 2015). Therefore,
shifting toward clean and renewable energy is among the most remarkable objectives in the
agenda of many countries. International Renewable Energy Agency (IRENA) stated that shift in
energy use or in other terms, energy transition can be well-defined as a roadmap toward
converting the global energy industry into the one in which carbon-free energy resources replace
fossil-fuels counterparts and this process must be done till the 2nd half of the century. Renewable
energy, which is also called “clean energy”, can be elucidated as energy retained through
different sources such as wind, biomass, solar nuclear fusion, geothermal and others. The most
valuable and distinctive characteristics of renewable energy transition that raise its importance
for countries is that thanks to this energy three critical issues could find its solution: pollution
reduction, energy security, and long-term economic growth. Regarding higher level of
environmental discharge and the global urgency of the issue, pollution reduction is getting
significant attentiveness recently. In addition, The International Energy Agency (IEA) sets the
environment in the middle of the renewable energy transition. Moreover, major energy
institutions like IEA and IRENA determine technical innovation as one of the dominant
component in reducing pollution (Boshell, 2018). This is because, modern environmental
technology has potential to enable human being to utilize natural renewable energy sources, then
eventually, bring them into the form of power and utilizable heat. All of these processes can be
done thanks to tools like solar panels, wind turbines, and water turbines. This shows that
technological breakthrough can be used to affects environment protection positively. In other
terms, due to many studies on this issue, it is already common sense that technological
development is vital to reduce pollution (Suurs & Hekkert, 2009; Hasanov et al., 2020). Also,
some recent studies such as, Ali et al. (2020), Ding et al. (2021), Dong et al. (2020a), Dong et al,
(2020b), Hussain et al. (2020), Su et al. (2020), found out that the technological improvement
and renewable energy lessened environmental degradation.
With regard to all of these mentioned facts, studying the consequences that renewable energy
consumption can have over greenhouse gas ejections will be very important in case of an oil-rich
country, Azerbaijan. That is why, the objective of this research paper is to explain the association
among renewable alternative energy and CO2 emission and detect whether transition or shift
toward alternative and relatively cleaner energy consumption affects harmful gas ejections in
Azerbaijan. For this purpose, Johansen cointegration, VECM, VDC were employed to test and
explain the long run cointegration link among the selected economic indicators.
In terms of the contribution of this paper, it can be stated that by assessing whether there is
strong bond or not between alternative and clean energy and greenhouse gas discharge, this
research paper contributes to the present literature in several ways. The most remarkable
influence of this paper is that there has been no empirical study which analyzed the effect of
renewable energy on harmful gas emissions for Azerbaijan according to the best of authors’
knowledge. Also, we added other variables which are exports, imports separately and GDP
growth in the model not considered in many previous studies. Moreover, Azerbaijan gives a
unique opportunity to explore the association between CO2 and alternative energy. This is
because; the country is rich with both natural and renewable energy resources and recently it is
increasing its investments on renewable energy. The structure of the residual part of the study is
as follows: Related studies are reviewed in Section 2. This is followed by econometric
estimations in Section 3. Empirical findings are explained in Section 4. And the last part, Section
5 concludes the research with policy implementation.
BIBLIOMETRICS AND LITERATURE REVIEW

To better understand the literature which analyzes the nexus between alternative energy and

CO2 ejections, bibliometric analysis using VOSviewer was utilized. In the first step, by using the

filter of “renewable energy” and “CO2 emissions”, 5715 papers were extracted from the Scopus

database. The search criteria can be observed in the figure 1 below.

Figure 1 (Source: Scopus.com (2022)

After extracting the main info about relevant papers on the target topic, some analysis were made

using visualization effect. In the figure 2, the top researchers who did researches related to CO2

and renewable energy were ranked according to their average citation. This ranking will help us

in choosing the most valuable authors and explore their works on this topic deeply during the

process of research. Based on this ranking it can be seen that the main researchers in this field

have an average citation of more than 40 per document.

Figure 2a (Source: Scopus.com, (2022) Figure 2b (Source: Scopus.com, (2022)

The subject area of the investigations about clean energy and CO2 ejections were given in the

figure 2a, while the top countries where these research papers are done was illustrated in the

figure 2b below.

According to the figure 2a, it can be detected that majority of papers on the linkage between

alternative energy and environmentally-detrimental gas ejections were written by dominantly

researchers in China, the USA, UK, Germany. However, researchers in China are more

concentrated on renewable energy issues. Therefore the portion of China take 24% of overall

selected research papers, while the second place which was taken by the USA have only 14%.

This could be explained as the need of the country to shift toward clean and renewable energy

and how China gives importance to that. On the other hand, based on figure 3b, the main subject

areas of the papers about alternative and clean energy and CO2 emissions are Energy,

Environmental Science, and Engineering.

Figure 3 (Source: Scopus.com, (2022)

Papers published on renewable energy

and CO2 nexus
1200
1000
800
600
400
200
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

In figure 3, it can be seen that the number of papers on renewable energy and CO2 emissions

increased significantly from 2010 till 2021. This increasing phenomenon can be explained by the

rising importance of the harmful gas emissions and environmentally-clean energy for the overall

global economy. Taking into account that current year has not ended yet, it is normal to have a
comparably lower number of papers on alternative energy and greenhouse gas emissions in 2022.

The chart 1 indicates the density visualization picture (obtained using in VOSveiwer). Some

researchers in this graph were shown in red color, this indicates that the papers written by these

researchers (mainly, Khan, Shahbaz, Jiao, Adedoyin, Bekun, Ahmed) are the leading papers in

the intended study in terms of the citation.

Chart 1 (Source: Scopus.com, (2022))

Based on the result of literature review process, it can be stated that the empirical investigations

on the determinants of greenhouse gas emissions (Co2) could be categorized into 3 diverse

groups: The first among them (Zubair, (2012), Saboori, (2012), Mikayilov et al., (2018))

indicates that variations with regard to CO2 emissions can be explained mainly by some

important economic indicators such as per capita GDP, openness of trade, FDI, improvement of

the financial sector. From other perspective, the second group evaluates the power of social

variables on environmentally-harmful gas discharges. More precisely, researchers in this group

indicate that social values (Carattini and Jo, 2021), cognitive abilities (Omanbayev et al, 2018)

and cultural values (Disli et al, 2016) are noteworthy driver of CO2 ejections. However, the

third group of researchers (Shafiei et al., 2014, Shahbaz and Sinha, 209) on CO2 and alternative

energy related investigations claim that it is the utilization of energy and economic improvement

from the perspective of GDP which significantly affect the level of CO2 ejections, consequently
the level of environmental degradation. Therefore they concentrate on these variables in order to

estimate the conventional gas emissions.

Currently, there is a debate over the role of environmentally-friendly energy in sustainable

development. Therefore, many researchers did their best to understand the contribution of

alternative energy on the process of decreasing of harmful gas or in other terms CO2 ejections.

(Jan et al., 2021, Ozbugday and Erbas, 2015, Saidi and Omri, 2020). While most of the

researchers such as Apergis and Payne, (2015), and Hanif, (2018) revealed positive nexus

between alternative energy and CO2 discharges, there are other studies like Zaghdoudi, (2017)

and Emir et al., (2019) which revealed that the link between these variables is not very obvious.

In addition to this, there are even a few studies that found that alternative energy consumption

can lead to more CO2 emissions (Lu (2017), Zrelli (2017) and Jebli, (2019)).

Using VECM, Granger Causality and CUSUM econometric methods, Bekhet and Othman

(2018) explored the role of environmentally-friendly energy on the link between CO2 and GDP

for Malaysia. The results revealed that alternative environmentally-friendly energy has an

opposing effect over detrimental gas discharges. Meanwhile, Apergis et al. (2015) researched the

outcome of alternative energy utilization on CO2 ejections for 11 South American countries for

years 1980-2010 using PCM method. Based on the outcome of this research it was detected that

REC has a decreasing effect on conventional harmful gas discharges for these eleven countries.

In addition, Chen (2019) analyzed the same phenomenon for China by utilizing ARDL method

for the period range from 1980 to 2014 and found negative link between the variables. On the

other hand, considering the time period of 1975-2016, Naz et al (2019) tested the link among

these targeted variables in an example of Pakistan and the results of the empirical study using

ARDL indicated that renewable energy consumption has an opposing and statistically
remarkable influence over harmful gas discharges.

With regard to insignificant or no causal relationship between so-called environmentally-friendly

energy depletion and damaging gas emissions, there are a few investigations which are worth

mentioning. For instance, in the study by Pata (2018) renewable energy and CO2 nexus in

Turkey was explored for the years 1975-2016. The result revealed no Granger Causality. Thus

the leader-follower link between these variables is not statistically significant. Furthermore,

Paweenawat and Plyngam (2017) found that in Thailand there is no statistically significant

impact of environmentally-friendly energy usage over harmful gas discharges. In addition, by

employing VAR method, Yazdi and Shakouri (2018) analyzed this nexus in case of Germany for

the time period of 1975-2014. The outcome of this research was consistent with those of

Pata(2018) and Paweenawat and Plyngam (2017). Thus no leader-follower link occurs between

alternative energy and harmful gas ejections.

Considering the studies done on this topic, it can be concluded that the result can be different

based on the country and the model used. Some researchers relate these various outcomes to the

income level and economic improvement in the nation. Therefore, it is extremely interesting to

evaluate this phenomenon in case of a big oil exporting country in the Caucasian region,

Azerbaijan. Currently, according its sustainable development roadmap set in 2020, the nation has

a strong desire to grow sustainably. One of the goals of the country is to increase renewable

energy consumption for this purpose. In addition, thanks to released Nagorno-Karabakh region,

the country has huge hydropower resources right now. Additionally, there was no previous

research which tested alternative energy and greenhouse gas discharges nexus for Azerbaijan.

Therefore it will be very beneficial to evaluate the outcomes of rising portion of clean and

alternative energy in total energy consumption.

Being a vital topic, factors that affect CO2 emissions have been extensively studied. Ding et al

(2021), Mikayilov et al. (2017), Liddle (2018); Hasanov et al. (2018), Gurbanov (2021) study

impact of various macroeconomic indicators over consumption-based and various sector CO2

emissions. In this paper, we focus on researches which study impact of alternative and the

consumption of clean energy, per capita real GDP, exports and imports among other factors on

carbon discharges. In this context, Zakarya et al. (2015) studied cointegration between per capita

GDP, per capita harmful carbon ejections (CO2), FDI and the total energy utilization using

Granger causality for panel data. They found out that there is a one directional causation from

CO2 to other listed variables. Bastola and Sapkota (2015) examine causal link among real GDP,

CO2 emission and energy consumption by taking privileges of ARDL bounds tests in one of the

most climate vulnerable country, Nepal. They found that the causality relationship is one

directional and it occurs from real GDP growth to both CO2 ejections and energy depletion.

Considering Kazakhstan to be an oil-rich post-Soviet country like Azerbaijan, studies should be

interesting. To examine effect of economic growth, which is proxied by GDP per capita on CO2

emissions, Akbota and Baek (2018) employ autoregressive distributed lag (ARDL) cointegration

for the period of 1991-2014. Their findings revealed a conventional theoretical expected result

which is as follows: GDP growth affects positively to CO2 at a low income level, while it lessens

it at a high level, which means EKC holds for CO2 emissions in Kazakhstan. Nevertheless, in

2019 Hasanov et al. (2019) study the influence of GDP per capita over ahrmful gas discharge per

capita from 1992-2013 using various cointegration methods. They reported monotonically rising

effect of GDP over carbon discharge, which is contrary to Akbota and Baek (2018)’s findings

EKC does not hold for Kazakhstan. At their latest study Mikayilov et al. (2020) investigate the

consequences of rising international tourism on consumption-based CO2 discharges adding

import and export variables as additional explanatories in Azerbaijan from 1995 to 2013.

Employing FMOLS method, they find that increase in international tourism raises CO2 emission

which has negative impact on environment. Thio et al. (2021) use extended Environmental

Kuznets Curve STIRPAT model to gauge impact of GDP per capita, technological innovations,

exports and imports on carbon ejections in selected 10 countries including Mexico, India, China,

South Africa and others. Their findings revealed that a rise in GDP per capita leads to a

significant positive impact on carbon emissions, whereas innovations affects negatively.

METHODOLOGY AND DATA

Following the econometric specification suggested by Hasanov (2021), the consumption-based
CO2 emissions is modeled as a dependent variable of alternative and clean energy consumption,
real GDP per capita, export and import. Therefore, the used functional specification can be
showed as below:

𝑙𝑛𝐶𝑂2t = 𝛽0 + 𝛽1𝑙𝑛𝑅𝐸𝑡 + 𝛽2𝑌𝑡 + 𝛽3𝑙𝑛𝐸𝑥𝑝𝑡 + 𝛽3𝑙𝑛𝐼𝑚𝑝𝑡 + 𝜀𝑡 (1)

Here, CO2t represent consumption-based carbon dioxide emissions, REt represents renewable
energy consumption Yt represents GDP growth, Expt represents exports of goods and services,
Impt represents imports of goods and services and εt is an error term. β1, β2, and β3 indicate the
percentage changes in consumption-based carbon dioxide ejections while renewable energy
consumption, GDP growth, export and import changes 1%, respectively. More precisely, all of
these coefficients indicate elasticity.
Consumption-based carbon dioxide (CO2) emissions are a dependent variable. It is expressed in
million tonnes of CO2, (MtCO2). According to recent research, considering consumption-based
CO2 rather than territorial-based CO2 is preferable (Peters et al., 2012). The remarkable benefit
of using consumption-based CO2 as a proxy of carbon ejections is that it includes ejections from
both final consumption and international purchasing (Wiebe & Yamano, 2016). In other terms, it
has been modified to consider the effect of international trade. This will help us to simply detect
carbon emissions produced in one country and consumed in another.
RE is renewable energy consumption in relation to overall energy consumption. Utilization of
alternative and clean energy derived from non-fossil sources is predicted to reduce consumption-
based CO2, per capita. real GDP growth (Y) is proxied in US dollars based on constant prices of
2010.
Both exports (Exp) and imports (Imp) are proxied at constant 2010 US dollars as percentage of
GDP. Based on the theoretical approach suggested by Hasanov et al. (2021), we can examine the
CO2 impact of exports and imports separately instead of combining them. We expect that
exports are going to influence consumption-based CO2 negatively. This is due to the fact that
while goods and services are generated in one economy, they are depleted in another country.
Based on our expectations, imports will have an upward-sloping impact on consumption-based
CO2 due to the fact that while goods and services are generated abroad, they are depleted in
domestic economy.
The data of RE, Y, Exp and Imp were obtained from the database of World Bank (WB, 2021),
while the data for CO2 emissions were obtained from Global Carbon Atlas. The logarithmic
form is used for each of the selected variables, except GDP growth (Y). Collected data
encompasses the time period of 1993 - 2019.

Econometric Methodology
The variables are initially checked for properties of stationarity. The ADF (Dickey and Fuller,
1981) as well as PP (Phillips and Perron, 1988) and KPSS unit root tests are employed for this.
In the second stage, optimal lag was selected using VAR. Afterward, the existence of the
cointegration among the selected economic factors is checked utilizing Engle-Granger (Engle
and Granger, 1987) and Johansen cointegration tests (both eigenvalue and trace). The Vector
Error Corretion Model (VECM) was employed to assess the long-term influence of RE, Y, Exp
and Imp on CO2 emissions. Furthermore, VDC, impulse response, persistence profile were also
employed during the analysis.

Empirical Outcomes and Analyses

At the first step, the stationarity properties for selected indicators were evaluated using the ADF.
PP and KPSS unit root tests were also employed in order to compare results with ADF. Based on
the comparison, it was found that ADF and PP has the same results for each of the variables, thus
 all are integrated of order 1. However, KPSS has some minor differences as it is biased toward
being stationary. (Table 1 indicates the summary of the unit root tests according to ADF, the
other test results were given in the separate appendix file). Considering the table 1, taking into
account the outcomes of the tests, all variables series were found to be non-stationary at their
initial form, but they became stationary when we differenced them once. This outcome states that
all of the selected indicators are I (1). As a consequence of this result, the cointegration link
among the chosen variables may be examined.

Table 1. Findings of unit root tests

ADF unit root test

Variable FORM Model Test Statistic CV outcome
LREC level ADF(1) -1.6497 -3.6742 non-stationary
LIMP level ADF(1) -2.7434 -3.6742 non-stationary
LGDP level ADF(1) -1.7805 -3.6742 non-stationary
LEXPO level ADF(1) -3.1669 -3.6742 non-stationary
LCO2 level ADF(3) -3.4524 -3.5435 non-stationary
DREC 1st differenced ADF(1) -2.9594 -2.0174 stationary
DIMP 1st differenced ADF(1) -2.3731 -2.0174 stationary
DGDP 1st differenced ADF(1) -3.6488 -1.6245 stationary
DEXPO 1st differenced ADF(1) -3.6806 -3.0733 stationary
DCO2 1st differenced ADF(1) -2.6922 -2.0174 stationary
Note: The critical values were calculated based on 95%. All variables were found to be I(1).

To determine the cointegration relationship, trace and eigenvalue tests under Johansen
assessments were used, and the findings are provided in Table 2 below. The outcomes of the
evaluation and analysis explained that the chosen economic factors have 3 long-term co-
movement nexus (The result of Engle granger test were given in the separate appendix file).

Table 2. Outcomes of Cointegration Tests

Cointegration with unrestricted intercepts and restricted trends in the VAR Cointegration with unrestricted intercepts and restricted trends in the VAR
Cointegration LR Test Based on Maximal Eigenvalue of the Stochastic Matrix Cointegration LR Test Based on Trace of the Stochastic Matrix
**************************************************************************************************************************************************************
23 observations from 1997 to 2019. Order of VAR = 3. 23 observations from 1997 to 2019. Order of VAR = 3.
List of variables included in the cointegrating vector: List of variables included in the cointegrating vector:
LCO2 LEXPO GDP LIMP LREC LCO2 LEXPO GDP LIMP LREC
Trend Trend
List of eigenvalues in descending order: List of eigenvalues in descending order:
.97982 .94043 .68964 .49040 .31569 .97982 .94043 .68964 .49040 .31569
**************************************************************************************************************************************************************
Null Alternative Statistic 95% Critical Value 90% Critical Value Null Alternative Statistic 95% Critical Value 90% Critical Value
r = 0 r = 1 89.7669 37.8600 35.0400 r = 0 r>= 1 205.7820 87.1700 82.8800
r<= 1 r = 2 64.8746 31.7900 29.1300 r<= 1 r>= 2 116.0152 63.0000 59.1600
r<= 2 r = 3 26.9108 25.4200 23.1000 r<= 2 r>= 3 51.1406 42.3400 39.3400
r<= 3 r = 4 15.5050 19.2200 17.1800 r<= 3 r>= 4 24.2298 25.7700 23.0800
r<= 4 r = 5 8.7248 12.3900 10.5500 r<= 4 r = 5 8.7248 12.3900 10.5500
**************************************************************************************************************************************************************
Use the above table to determine r (the number of cointegrating vectors). Use the above table to determine r (the number of cointegrating vectors).
3cointegration can be explained by plausible nexus between IMP, EXPO and GDP in
expenditure method, GDP and LREC as economic growth increase country invest more in RE,
GDP and CO2 according to environmental Kuznets curve. After proving the existence of
cointegration relationship, we further our econometric process with Vector Error Correction
Model (VECM) to estimate the nexus among variables.
Table 3: The results of VECM
3.a 3.b

The estimation findings show that in the short-term coefficients of lagged and differenced CO2,
EXPO, IMP, REC and GDP have no statistically significant influence on consumption-based
greenhouse gas ejections, as shown in Table 3a. However, error correction term is significant at
95% confidence interval and more than -1. This means that our variable LCO2 is endogenous
(follower) and in the long-run the model is over-adjusted, respectively. At the same time, with
regard to the diagnostic tests it can be claimed that all test results are desirable, except functional
form. For this purpose, to correct functional form, we considered VAR (2) instead of VAR(3).
(The details of VAR lag length selection criteria were given in appendix file). Based on the
results in table 3b, coefficients of short-term variables were all statistically insignificant, except
for LCO2. The coefficient of ECM was significant at 90% confidence interval. This can be
interpreted as LCO2 is dependent (endogenous) variable. At the same time, all of the diagnostic
tests are desirable which increases the reliability of the model. However, coefficient of ECM is
0.24 which means the in the long run the model goes away from its static equation. Similarly we
tested the VECM for all of the variables as dependent ones and found out that LEXPO, LREC,
GDP growth are exogenous, while LCO2 and LIMP are endogenous variables (other non-
exhibited relevant tests were given in the separate appendix file).
In the below table, results of VDC were given. Based on that, we can easily compare the level of
relative endogeniety and exogeniety among variables.
Table 4. Results of VDC
Date LCO2 LREC GDP LEXPO LIMP SELF-DEPENDENCE
RANK CONSISTENCY
LCO2 4 41% 7% 25% 9% 17% 41% 5
LREC 4 13% 54% 25% 6% 3% 54% 4
GDP 4 15% 6% 70% 2% 7% 70% 2
LEXPO 4 18% 3% 6% 70% 3% 70% 1
LIMP 4 8% 12% 3% 9% 67% 67% 3
Date LCO2 LREC GDP LEXPO LIMP SELF-DEPENDENCE
RANK CONSISTENCY
LCO2 13 39% 15% 16% 6% 24% 39% 5 TRUE
LREC 13 14% 46% 27% 9% 4% 46% 3 FALSE
GDP 13 10% 3% 62% 13% 11% 62% 2 TRUE
LEXPO 13 17% 1% 4% 74% 3% 74% 1 TRUE
LIMP 13 8% 24% 24% 4% 40% 40% 4 FALSE
Date LCO2 LREC GDP LEXPO LIMP SELF-DEPENDENCE
RANK CONSISTENCY
LCO2 25 40% 18% 13% 3% 26% 40% 4 FALSE
LREC 25 14% 45% 27% 10% 4% 45% 3 TRUE
GDP 25 11% 2% 62% 11% 13% 62% 2 TRUE
LEXPO 25 17% 1% 4% 75% 3% 75% 1 TRUE
LIMP 25 8% 25% 26% 3% 37% 37% 5 FALSE

According to the table, it can be easily observed that LCO2 is the most dependent variable for
time horizon of 4 and 13. However, in the time horizon 25, LIMP becomes the most endogenous
variable. The most leader variables which keep its dominance on remaining leader over time are
LEXPO and GDP, while the most dependent ones are LCO2 and LIMP. In conclusion, these
outcomes are consistent with those findings in VECM.
As the next step we did impulse response and persistence profile for the selected variables and
model. The outcomes of this assessment were given in the table 5 and 6, respectively. According
to table 5, the effects of 1 standard error shock in LREC over other variables were evaluated. As
a result of shock in LREC, all of the variables were normalized averagely, after 4 periods as it
was shown in the graphs.
Table 5. Impulse response results

Generalized Impulse Re sponse(s) to one S .E. s hock in the e qua tion for LREC Ge ne ralize d Impuls e Re sponse (s ) to one S.E. s ho ck in the e quation for LREC

-0.015 0.25

-0.020 0.20

-0.025 0.15

-0.030 0.10

-0.035 0.05

-0.040 0.00
0 13 26 39 50 0 13 26 39 50

LCO2 LEXPO

Generalize d Impuls e Re sponse (s ) to one S.E. s ho ck in the e quation for LREC Ge ne ralize d Impuls e Re sponse (s ) to one S.E. s ho ck in the e quation for LREC

0.16

0.186
0.14
0.184
0.12 0.182

0.180
0.10
0.178
0.08 0.176

0.174
0.06
0.172
0.04 0.170
0 13 26 39 50 0 13 26 39 50

LIMP LREC

Genera lize d Impuls e Response (s) to one S .E. s ho ck in the equation for LREC

1.0

0.5

0.0

-0. 5

-1. 0

-1. 5
0 13 26 39 50

GDP

Considering the persistence profile in the last graph of table 6, it can be stated that the effect of
system wide shocks to the cointegration vector can be eliminated after approximately 2 periods.
Differing from impulse response results, the persistence profile evaluates the impact of other
outside shocks which affect all of the variables. A good example to them could be the financial
crises of 2008 which affected almost every economic indicator of countries. Also, currently,
COVID-19 can be given as a good example. Even if not directly, COVID-19 had impact
indirectly almost in every side of the economy. Therefore, the effects of the shocks like these can
be evaluated under persistence profile.
Table 6. Persistence profile

Pe rs is te nce Pro file of the effec t of a s ys tem-wide s ho ck to CV(s )

1.0

0.8

0.6

0.4

0.2

0.0

-0 .2
0 13 26 39 50

CV1

Conclusion
The study analyzes how renewable energy consumption, GDP growth, exports, and imports
influence consumption-based harmful gases ejections (CO2). We tested variables for a unit root
as a first step, and the findings confirmed their stationarity in first differenced form, allowing us
to test variables for a common long-run tendency. The cointegration link between renewable
energy consumption, economic growth, exports, imports and consumption-based CO2 emissions
in Azerbaijan was estimated using the trace and Eigenvalue test under Johansen cointegration
assessment. Finally, we performed the VECM method to evaluate the long-run link among these
variables. According to VECM estimation results, both CO2 emissions and imports are
dependent endogenous in the long-term. However, the short term impact of LREC on CO2
emission was found to be insignificant. After that, VDC, impulse response and persistence
profile were implemented. The results stated that LCO2 and LIMP are the most dependent
variables, while LEXPO, GDP and LCO2 are the most exogenous variables.
Based on the outcome of the empirical analysis, the insignificant effect of increasing renewable
energy consumption on CO2 emission can be explained from the perspective of scale effect. This
means while the people will increases renewable energy, the use of this clean energy is again
very small in comparison to conventional energy use. Therefore, it is not in a state of having
strong impact over CO2 emissions. Therefore, the rising usage of clean renewable energy
doesn’t substitute and drive out significant portion of conventional energy. However, high scale
transition from traditional energy sources to renewable energy sources will be very beneficial for
the country, as conventional energy resources are main cause of greenhouse gas emissions,
decrease in their usage will lead CO2 emissions to lessen.
In VECM (VAR(2)) results, even though it was insignificant, the positive impact of economic
growth on greenhouse gas emissions is plausible from economic point of view. This is because;
increasing real production (rise in real GDP) can only be achieved through using more energy.
Therefore, demand for energy will increase during the time of rising economic growth. To meet
rising energy demand in this period, the country will try to utilize more affordable energy
resources. In the case of Azerbaijan, oil and gas is more affordable than renewable energy
sources. Therefore, country promotes the usage of oil and gas reserves to generate energy which
consequently increases CO2 emissions.
Meanwhile, whereas it was not very significant, exports can lead to decrease in harmful gas
emissions. This can be explained with that even though the export revenues come to Azerbaijan
thanks to oil and other goods, the distribution of this export revenues or in other terms spillover
of these export revenues are not good enough over the economy. Eventually, it doesn’t foster
energy consumption of individuals and firms a lot.
Considering Azerbaijan economy, to increase the renewable energy consumption, 12 big and 7
small hydroelectric plants were constructed in the country. In addition to this, the country built 6
wind, 10 solar, and 6 biomass power plants during 2018-2020 that own an installed capacity of
420 megawatts (MW) (Bilalova, 2020). But to better address the rising energy need, Azerbaijan
should efficiently invest in renewable energy. If the country invests highly on renewable energy
plants using its oil revenues, in the near future the cost of generating renewable energy in these
plants could be competitive with the cost of producing energy from conventional oil and gas
reserves. Meanwhile, taking into the account that the pollution or in other terms environmental
degradation in the global world is rising day-by-day, further costly restrictions can be imposed
on conventional energy use. Before having this kind of high and costly restrictions, Azerbaijan
can have immense benefits and advantages if it becomes among the “first-movers” to the
renewable energy.
Considering the current situation after second Karabakh war in Azerbaijan, it can be stated that
thanks to new land liberated from occupation, the country gained opportunity to implement its
projects with regard to renewable energy. This is because, the liberated land, Karabakh has huge
advantage in terms of alternative and clean energy, as there are lots of mountains and rivers
which flow from these high mountains. Considering all of these facts, it is a good idea to utilize
this land to increase renewable energy production.

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