EVIDENCE OF THE ENVIRONMENTAL KUZNETS CURVE: IMPLICATIONS OF INDUSTRIAL TRADE DATA

Abstract

This study examines the dynamic relationship between CO₂ emissions and economic growth in Malaysia for the period of 1980-2004. The evidence of the Environmental Kuznets Curve (EKC) is tested by including energy consumption, dirty export from Malaysia to China and dirty import from China to Malaysia based on the two and three-digit ISIC data which reflect pollution-intensive manufacturing. Using dirty industries for the period of 1980-2004, the existence of Pollution Haven Hypothesis (PHH) was tested by employing ARDL approach of cointegration and the Fully Modified Ordinary Least Squares (FMOLS). Six out of eight dirty industries are found to show statistically significant inverted U-shaped relationship between CO₂ emissions and economic growth, thus the EKC. Export from industries such as textile, wearing apparel and leather, manufacture of fabricated metal products and electrical machinery significantly increase CO₂ emissions in Malaysia. Most of the import coefficients are significant and positively related to CO₂ emissions, which is in contrast to the PHH. This strongly rejects the PHH for CO₂ emissions in Malaysia-China trade. There is no evidence that domestic production of pollution-intensive goods in Malaysia is being replaced by imports from China. Based on the analysis, Malaysia-China bilateral trade increases CO₂ emissions in Malaysia. There is therefore urgent need that electricity generation in Malaysia is from clean and sustainable sources. There have been efforts by the Malaysian government towards achieving this objective through its many related policies introduced since the beginning of this new millennium.