Pathway to environmental sustainability: Nexus between economic growth, energy consumption, CO2 emission, oil rent and total natural resources rent in Saudi Arabia

Abstract

This study aims to empirically explore the long-run and causality relationship between energy consumption, oil rent, total natural resources rent, economic growth, and CO2 emission for a top oil-exporting country (Saudi Arabia). In this study, we rely on the modified Wald test of Toda-Yamamoto methodology to investigate the direction of causality between the highlighted variables between 1971 and 2016 on an annual frequency. The empirical result shows a long-run equilibrium relationship between the variables as outlined by Pesaran Bounds test. The long-run regression validates the energy-induced environmental pollution as seen where a 1% increase in energy consumption depletes environment by 0.360% and 0.983% in both short and long-run periods, respectively. Similarly, there is increased economic growth-induced environment degradation by 0.952% and 0.625% in both the short and long-run period, respectively, over the sampled period. Furthermore, a significant positive nexus is seen between the country’s’ total natural resource rent and CO2 emissions in both the short and long run. This suggests the over-reliance on natural resource rent affects environmental sustainability in Saudi Arabia if conservation and management options are neglected. Interestingly, oil rent shows evidence to dampen the effect of environmental degradation in Saudi Arabia. In the causality analysis, a feedback relationship is seen between energy consumption and economic growth while one-way causality is observed between energy consumption and CO2 emission; similar unidirectional causality is seen between oil rent and CO2 emission. These outlined results have environmental implications for policy makers and practitioners to present a macroeconomic blueprint, as we see energy conservative agenda will hurt economic progress in Saudi Arabia. However, given increase, energy consumption increases economic growth and its environmental implications call for sustainable and green energy sources, such as renewables, in Saudi Arabia’s energy mix. More insights and policy direction are highlighted in the concluding section.