A great percentage of the world’s primary energy demand is met by fossil fuels (World Energy Outlook, 2016). Unfortunately, the use of fossil fuels yields numerous undesired joint products, with carbon dioxide (C02) being the most prominent among them. This man-made change has negative and potentially irreversible effects on human health, air and water quality, agriculture, welfare and the world economy. Being a major exporter of fossil duel, Nigeria is susceptible to increased CO2 emissions due to its utilization in construction, industrial production and social activities. Environmental degradation can also be caused by factors such as population, transportation, poverty, congestion and traf?c, soil erosion, exploitation of open access resource due to ill-de?ned property rights, etc. (Borhan et al.
, 2012). Intensive and excessive use of fossil fuels is one of the main reasons for the signi?cant increase in anthropogenic Green House Gas emissions that lead to climate change (Chen et al., 2013). Furthermore, Boopen and Vinesh (2011) posit that CO2 emissions have grown dramatically in the past century, largely due to human activities, primarily by the use of fossil fuels and changes in land use. This increase in the emissions of green house gases causes increase in global warming which has become a major threat to mankind.
A plethora of studies have examined the relationship between environmental quality and economic growth with many often hinging their studies on the Environmental Kuznet Hypothesis (see e.g., Grossman and Krueger, 1991; and Kraft and Kraft, 1978). However, there is a growing debate on the role of institutions (such as rules of law, bureaucratic quality, corruption, risk of expropriation and government repudiation of contracts) and how this affects this relationship (see e.g., Lau et al.
, 2014). This has generated the argument that economic performance of developed and developing countries largely depends on each country’s institutional conditions or absorptive capacity. The quality of institutions plays an important role whereby it helps to reduce environmental degradation in a country even if the country’s income is low. This implies that countries are expected to enjoy improvements to the environment with higher future income levels because institutional quality can reduce the environmental cost of higher economic growth.
This is true because the quality of institutions matters as it helps to minimise opportunism and foster cooperative behaviour among agents, and to enable agents internalise externalities. Thus, the improvement of institutional quality can provide a favourable environment for the adoption of cooperative solutions that will in turn help to enhance economic growth. On these grounds, it is generally agreed, based on the findings of existing literature (see e.g., Acemoglu et al., 2006 and Chauffour, 2011) that in order to minimize the effect of pollution on economic growth, the appropriate institutions must first be in place. However, does this assertion hold for Nigeria?Economic indicators, such as Gross Domestic Product (GDP), in general are not designed to be a comprehensive measure of well-being and prosperity.
Kuznets (1934), states that the welfare of a nation can scarcely be inferred from a measurement of national income. However, GDP’s clear methodology and a long history of its usage by economists and policymakers alike, make it a widely exploited indicator of economic activity. Therefore, GDP is used in this paper as an indicator of economic growth. “Without measures of economic aggregates like GDP, policymakers would be a drift in a sea of unorganized data” (Samuelson and Nordhaus, 1995). Generally, producers are prone to using non-renewable sources of energy such as carbon based fossil fuels. Combustion of these fuels produces CO2 and other GHG emissions as a by-product.
GDP grows with the growing increase in production, which consequentially means an increase in the use of fossil fuels and the growth of CO2 emissions. One possible solution is to create a low-carbon world economy, which in turn has technological, economic, engineering, and organizational obstacles. The biggest obstacle in creating a global agreement that takes into account the consequences of climate change is the strong negotiating position of countries with great reserves of fossil fuels, such as the United States, Russia, China, Canada, and the countries of the Persian Gulf. Due to different levels of ?nancial and technological development of countries, and different intensities of CO2 emissions, a global instrument that takes into account all of these obstacles is essential.In the existing literature, a number of studies have examined the CO2 emissions, institutions and economic growth nexus with many often concentrating only on developed economies (see e.g., Halkos and Tzeremes, 2013) and very few researches on developing economies. To the best of the researchers’ knowledge, this is the only country specific on the effect of CO2 emission, institutions and economic growth in Nigeria.
The study examines the joint impact of CO2 emission and institutions on economic growth. Moreover, the study is intended to contribute to the existing literature; relatively few studies have empirically examined the effect of institutional quality in the CO2 emissions – economic growth nexus. This paper investigates the effect of CO2 emission and institutions on economic growth in Nigeria. The sequence of this paper is clear. Section II highlights the trend of discussion in the literature. Section III discusses the data and methodological issues while a discussion of the main empirical ?ndings is provided in Section IV. Section V concludes.2.
0 Literature reviewThere is a rich empirical literature on the relationship between environmental quality and economic growth, including several studies of pollution convergence, thus testing whether there is a negative growth-level relationship in environmental pollution. Dinda and Coondoo (2006) explored the short-term dynamics of the income–emission relationship in 88 countries. The results showed that cointegration exists between CO2 emission and GDP per capita in North America, South America, Asia, and Oceania. Soytas et al., (2007), found that energy consumption Granger eventually causes carbon emission.
Warr and Ayres (2010) found that unidirectional causality existed from energy to GDP. An increase in supplied energy has both short-term and long-term effects to increase the output; however, output growth does not increase energy consumption. The researchers suggest that an increase in energy inputs can sufficiently stimulate the output growth in the short run. Meanwhile, over a period of several years, GDP positively responds to increased energy and useful work inputs by readjusting to the long-term equilibrium relationship. Recently, Borhan, et al.
, (2013), applied the fixed and random effects model to examine the relation between pollution and economic growth.Oh and Lee (2004) found that unidirectional causality exists from GDP to energy in the long run, implying that enforcing an energy conservation policy is feasible without compromising economic growth in Korea. At the same time, Hung and Shaw (2004) used panel data model to test air pollution and income whether existed EKC relationship or not. They especially observed that making new regulation in 1990 and renovating air-quality monitoring stations in 1994 did not reduce air pollution. Halicioglu (2009) examined the dynamic causal relationships among carbon emission, energy consumption, income, and foreign trade in Turkey; he found that income was the best variable in clarifying the carbon emission in Turkey, and then found energy consumption and foreign trade could explain the carbon emission.
However, Talebi et al., (2012), found that there is no relationship from GDP to energy consumption in Iran.Most attention has been devoted to convergence of carbon dioxide (CO2) emissions at the global or regional level (e.g., Strazicich and List 2003; NguyenVan 2005; Aldy 2006; Ezcurra 2007; Panopoulou and Pantelidis 2009; Westerlund and Basher 2008; Camarero et al. 2008, 2013; Brock and Taylor 2010; Kumar and Managi 2010; Orda ´s Criado et al.
2011). The economic theory recognizes that the per capita output in a country is determined by the amount of physical capital, human capital and technological advancement. Acemoglu and Robinson (2010) argue that human capital, physical capital and technology are the only determinants of growth. They further state that to find out why some countries grow faster than others, we need to look for more fundamental causes which may underlie the proximate differences across countries. Over the last three decades, the focus of thinking has shifted away from the so called ‘proximate causes’ to the more ‘fundamental causes’ of economic growth. In this context, the role of institutions in explaining the cross-country differences in the economic growth has received more attention. The path breaking studies by North and Thomas (1973), North (1981), Olson (1982) and Jones (1987) inspired the researchers to explore the role of institutions in explaining the persistent differences in the economic development across countries (see e.g.
, Lau et al., 2014). The relevant literature suggests that institutions play a significant role in determining the growth performance of nations. The quality of institutions in any given country plays an important role in determining the growth process by influencing the incentive structure for investment in human and physical capital as well as technological advancement and innovations.It is generally believed that institutions, particularly the security of property rights play a key role in determining the long-run economic growth (Knack and Keefer, 1995; Rodrik et al., 2004).
North (1990) argues that secure property rights and better contract enforcement determine growth. He states that the failure of the developing countries to design institutional framework based on secure property rights and enforced contracts is the major reason for their underdevelopment. An enormous amount of empirical work examining the relationship between institutions and growth has developed over the last three decades. Knack and Keefer (1995) using data for 97 countries over 1974–1989, showed that the quality of institutions is important for growth and investment. They used two institutional variables in growth regressions capturing the security of property rights and enforcement of contract using five indicators: i) rule of law; ii) corruption; iii) bureaucratic quality; iv) protection against risk of expropriation and v) repudiation of contracts. These indicators were from the International Country Risk Guide (ICRG) dataset. They also used four indicators: i) contract enforceability; ii) infrastructure quality; iii) nationalization potentials and iv) bureaucratic delays. These indicators were obtained from the Business Environmental Risk Intelligence (BERI) dataset.
They found that the relationship between institutional variables and the economic growth is positive. Mauro (1995), using cross section data for 67 countries over 1980–1983, shows that corruption is negatively linked with investment which lowers the economic growth. On the other hand, he finds that bureaucracy has a positive impact on the investment. Barro (1998), in a panel of 100 countries over the sample period 1960–1990, finds that ‘rule of law’ has a positive impact on growth.
Rodrik, et al. (2004), using the index of ‘rule of law’ as proxy for institutions, estimated the contribution of institutions, geography, and trade in determining income levels of the countries. They found that institutions have a strong impact on income. They also found that variables like geography and trade are insignificant once the institutions play their role effectively.
Hall and Jones (1999), following Knack and Keefer (1995), used a weighted average measure of institutions from the International Country Risk Guide (ICRG) dataset for 127 countries. They showed that differences in social infrastructure across countries are caused by large differences in capital accumulation, educational attainment, and productivity. This accounts for cross-country income differences. Acemoglu et al. (2001), using differences in European mortality rates as an instrument for contemporary institutions, found large effects of institutions on the income per capita. Acemoglu et al.
(2006) estimate the role of institutions on economic growth. They used ‘constraint on executive’ from Polity IV as a proxy for private property institutions. The authors showed that private property institutions exercise a major influence on long-run growth, investment and financial development. Valeriani and Peluso (2011) analyze the impact of institutional quality on the economic growth at different stages of development by employing a panel over 1950–2009 for 181 countries using a pooled regression and fixed effects.
They found a positive impact of institutions, measured by civil liberties, quality of government and number of veto players, on economic growth. They also showed that institutions are more effective in developed countries as compared to developing countries.Chauffour (2011), using data for more than 100 countries over 1975–2007, found that institutions, measured by economic freedom and civil and political liberties determine why some countries achieve and sustain better economic outcomes. This study shows that a one unit differential in the initial level of economic freedom between two countries (on a scale of 1 to 10) is associated with an almost 1 percentage point differential in their average long-run economic growth rates. For civil and political liberties, the long-term effect is also positive with a differential of 0.3 percentage point.