Causality of Environmental Degradation and Economic Growth in Indonesia

Sri Rahayu Budi Hastuti *

UPN Veteran Yogyakarta, Jl. SWK 104, Condongcatur, Depok, Sleman, Yogyakarta, 55283, Indonesia.

Didit Welly Udjianto

UPN Veteran Yogyakarta, Jl. SWK 104, Condongcatur, Depok, Sleman, Yogyakarta, 55283, Indonesia.

Rini Dwi Astuti

UPN Veteran Yogyakarta, Jl. SWK 104, Condongcatur, Depok, Sleman, Yogyakarta, 55283, Indonesia.

Ilyasin Aditya Rahman

UPN Veteran Yogyakarta, Jl. SWK 104, Condongcatur, Depok, Sleman, Yogyakarta, 55283, Indonesia.

*Author to whom correspondence should be addressed.


Nowdays, the issue of global warming is being widely discussed in all countries, both developed and developing countries, because of its negative impact on the environment. This study aims to develop an integrated analytical framework of causality between energy consumption, carbon emissions, financial development, trade openness, and economic growth in Indonesia, 1990-2021. This study provides research benefits in the form of a set of empirical evidence to assist in developing a series of key strategies that can improve environmental quality through sustainable development. With granger causality analysis and vector autoregression model, this study provides results that high economic growth and energy consumption can cause environmental degradation through increased carbon gas emissions.

Keywords: Environmental degradation, financial development, trade openness, economic growth

How to Cite

Hastuti, Sri Rahayu Budi, Didit Welly Udjianto, Rini Dwi Astuti, and Ilyasin Aditya Rahman. 2024. “Causality of Environmental Degradation and Economic Growth in Indonesia”. International Journal of Environment and Climate Change 14 (7):364-70.


Download data is not yet available.


Liu JL, Ma CQ, Ren YS, Zhao XW. Does real output and consumption of renewables affect CO2 emissions? Evidence for selected BRICS countries. Energy. 2020; 13:960.

Esen O, Bayrak M. Does more energy consumption support economic growth in clean energy importing countries? Journal of Financial Economics and Administrative Sciences. 2017;22:75–98.

Kablamaci B. Re-examination of causal relationships between economic growth and energy consumption: Evidence from 91 countries. Economic Bulletin. 2017;37: 790–805.

Dogan B, Deger O. Energy consumption and economic growth in E7 countries: Cointegration in panel data with structural pauses. Romanian Journal of Economic Forecasting. 2018;21:63–75.

Ayeche MB, Barhoumi M, Hammas, MA Causal links between economic growth, financial development, trade openness and CO2 emissions in European countries. American Journal of Environmental Engineering. 2016;6(4):110–122.

Sacraments H, Sghaier A. Examining the relationship between corruption, economic growth, environmental degradation, and energy consumption: Panel Analysis in the MENA Region. Journal of Knowledge Economics. 2018;9:963–979.

Ozcan B, Tzeremes PG, Tzeremes NG. Energy consumption, economic growth and environmental degradation in OECD countries. Economic Models. 2020;84: 203–213.

Baydoun H, Aga M. Effects of Energy consumption and economic growth on environmental sustainability in GCC Countries: Is Financial Development Important? Energy. 2021;14:5897.

Tariq B, AB Rahim R. Environmental impact of intra-industry trade in the SAARC region. International Journal of Business and Society. 2016;17(1):113–130

Shahbaz M, Nasir MA, Hille E, Mahalik MK. UK net zero carbon emissions targets: Investigating the potential role of economic growth, financial development and R&D spending based on historical data (1870–2017). Technology Forecasting and Social Change. 2020;161:120255.

Nosheen M, Iqbal J, Hasan SA. Economic growth, financial development, and trade nexus CO2 emissions for Southeast Asia. Environmental and Pollution Science Research. 2019;26:36274–36286.


Szymczyk K, ̧Sahin D, Bagcı H, Kaygın CY. Effects of Energy Use, Economic growth and financial development on CO2 emissions management: An analysis of OECD countries with high environmental performance indices. Energy. 2021;14: 4671.

Yang Z, Abbas Q, Hanif I, Alharthi M, Taghizadeh-Hesary F, Aziz B, Mohsin M. Short- and long-term effects of energy utilization and economic growth on carbon release in developing SREB countries. Renewables. 2020;165:43–51.

Sharma R, Shahbaz M, Kautish P, Vo XV. Does energy consumption reinforce environmental pollution? Evidence from emerging Asian economies. Journal of Environmental Management. 2021; 113272. Available:

Jamel L; Abdelkader D. Does energy consumption and economic growth cause environmental degradation? Evidence from Asian economies. Cogent Financial Economics. 2016;4:1170653.

Rauf A, Zhang J, Li J, Amen W. Structural changes, energy consumption and carbon emissions in China: Empirical evidence from ARDL-bound test models. Structure. Chang. Review of Economic Dynamics. 2018;47:194–206.

Mardani A, Streimikiene D, Cavallaro F, Loganathan N, Khoshnoudi M. Carbon dioxide (CO2) emissions and economic growth: A systematic review of two decades of research from 1995 to 2017. Total Environmental Science. 2019;649: 31–49.

Nair M, Arvin MB, Pradhan RP, Bahmani S. Is higher economic growth possible through better institutional quality and a lower carbon footprint? Evidence from Developing Countries. Renewables. 2021; 167:132–145.

Gujarati Damodar N. Econometrics by example, palgrave macmillan, New York; 2012.

Gujarati, Damodar N, Porter, Dawn C. Basic econometrics, 5th Edition, McGraw-Hill, Singapore; 2009.

Ali HS, Yusop ZB, Hooks LS. Financial development and energy consumption nexus in Nigeria: Application of ARDL bound testing approach. Journal International Energy Economics and Policy 2015;5(3):816–821.

Coban S, Topcu M. The relationship between financial development and energy consumption in the EU: Dynamic panel data analysis. Energy Economics. 2013; 39:81–88.

Adebayo T, Akinsola G, Odugbesan J, Olanrewaju V. Determinants of environmental degradation in thailand: empirical evidence from the ARDL and wavelet coherence approaches. Pollution. 2021;7:181–196.

Jalil A, Feridun M. The impact of growth, energy, and financial development on the environment in China: A cointegration analysis. Energy Economics. 2011;33: 284–291.

Li F, We YC, Wang MC, Wong WK, Xing Z. Empirical studies on CO2 emissions, financial development and economic growth of BRICS countries. Energy. 2021;14:7341.

Rahman MM, Saidi K, Mbarek MB. Economic growth in South Asia: The role of CO2 emissions, population density and trade openness. Heliyon. 2020;6:e03903.

Shahbaz M, Sharma R, Sinha A, Jiao, Z. Analysing the nonlinear impact of economic growth drivers on CO2 emissions: Designing an SDG framework for India. Energy Policy. 2021;148: 111965.

Ozturk ME, Acaravci A. Long-term and causal analysis of energy, growth, openness and financial development on carbon emissions in Turkey. Energy Economics. 2013;36(C):262–267.

Tamazian A, Rao B. Are economic, financial and institutional developments important for environmental degradation? Evidence of a transitional economy. Energy Economics. 2010;32(1):137–145.

Tang CF, Tan BW. The relationship between energy consumption, economic growth, relative prices, foreign direct investment and financial development in Malaysia. Quality and Quantity. 2014;48: 781–797.

Saidi S, Hammami S. Modeling the causal linkages between transport, economic growth and environmental degradation for 75 countries. Transportation Research Part D: Transport and Environment. 2017;53: 415-27.

Alvarado R, Toledo E. Environmental degradation and economic growth: Evidence for a developing country. Environment, Development and Sustainability. 2017;19:1205-18.

Steffen B. The importance of project financing for renewable energy projects. Energy Economics. 2018;69:280–294.

Boluk G, Mert M. Fossil consumption & renewable energy, GHGs (greenhouse gases) and economic growth: evidence from a panel of EU countries. Energy. 2014;74:439–446.

Lanouar C. The impact of energy consumption and economic development on Ecological Footprint and emissions (CO2): Evidence from the Markov switching equilibrium correction model. Energy Economics. 2017;65.

Mohsin M, Abbas Q, Zhang J, Ikram M, Iqbal N. The integrated effect of energy consumption, economic development, and population growth on CO2-based environmental degradation: the case of the transport sector. Environmental Science and Pollution Research. 2019;26:32824–32835.