Fossil fuel efciency as a pathway to decarbonisation and the role of international trade: A perspective of the LCC hypothesis

The continued global dependency on fossil fuel sources in the face of increasing international trade may hamper the goal of decarbonisation. To condense climate risk and attain net zero, efciency measures are proposed. This study unambiguously investigates the environmental quality implications of fossil fuel efciency in the face of the international trade based on the Load Capacity Curve (LCC) hypothesis for Canada from 1965 to 2022. The application of a dynamic ARDL simulations method uncovers the following fndings: (i) fossil fuel efciency engenders load capacity factor (lnLCF) in the short run (SR) and long run (LR). This suggests a dampening trend of environmental externalities as fossil fuel efciency increases. (ii) the connection between income expansion and lnLCF follows an inverted U-type pattern, thus invalidating the LCC hypothesis in Canada. (iii) the efect of international trade is positive but only signifcant in the SR. (iv) urban development is positively linked to lnLCF but its efect is perhaps signifcant only in the LR. These fndings corroborate the responses of the lnLCF to a 1% positive and negative counterfactual shocks in fossil fuel efciency, income expansion, international trade, and urban development. Moreover, the fndings are robust to the results of the nonparametric multivariate quantile-on-quantile regression model. Therefore, the policy take of these results is that to achieve net-zero emissions targets by 2050, environmental policies ought to promote not only fossil fuel efciency but also the growth of income expansion, trade, and urbanization.