Macroeconomic Variables and Its Impact on CO2 Emissions: An Empirical Study on Selected ASEAN Economic Community (AEC) Countries

Environmental issues related to sustainable development processes involve economic and non-economic aspects. Auffhammer and Mansur [5] has examined the relationship between energy consumption and climate change and its impact on long-term economic growth. The empirical findings explained the need for policies to control energy consumption to maintain environmental stability and degradation. In addition, Gilbert and Graff Zivin [6] researched the implications of taxation policies on people's consumption behavior and economic growth and their impact on carbon gas emissions. His findings indicated the need for appropriate taxation policies and creating an economic balance between the economic benefits and costs of any economic activity impacting the environment. Furthermore, Isaksen [10] studied the behavior of household energy consumption in Norway on CO₂ carbon gas emissions, which showed a significant relationship between people's per capita income and household energy consumption expenditures and the amount of CO₂ carbon emissions in Norway. Moreover, economic development here is a process of increasing people's per capita income, improving people's quality of life, and enhancing public awareness of social, political, and legal aspects of individual and social life [11]. Aside from producing output, economic activity also produces pollutants, which have a negative impact on the environment, both natural and social [10, 12].

In the early stages, the impact of pollutants on the environment is not too big, but its effects are already starting to be felt. However, at a later stage, it will have a significant effect on environmental degradation significantly. This condition results from the inability of the environment to absorb pollutants at a certain threshold [1, 13]. The below curve in Figure 1 explains the relationship between pollution and environmental degradation, where more pollutants increase environmental degradation. Curve A also explains a positive correlation between the number of pollutants and environmental degradation, which is linear. It means that constant changes in the number of pollutants will increase environmental degradation. However, economic development also produces pollution from industrialization and public transportation activities, which have an impact on environmental degradation. Meanwhile, curve B reveals the relationship between the number of pollutants and environmental degradation, which is exponential. It indicates that an increase in the number of pollutants will increase changes in environmental degradation by an increasing magnitude. In this case, the policy of determining the pollution level threshold at a certain amount will encourage an increase in environmental degradation with even greater changes, as shown in curve C. It signifies that when the amount of pollution exceeds the threshold, it will have a more serious impact on environmental degradation [14].

1.png

Source: Hanley, Shogren [14]

Figure 1. Environmental degradations

In addition, pollution is an externality phenomenon from an economic activity that can be derived in a mathematical formulation to reach the optimal point as follows [15]:

$\max _{s, f, x} p_s s+p_f \int-c_s(s, x)-c_f(f, x)$

$p_s=\frac{\Delta c_s(\hat{s}, \hat{x})}{\Delta c}$

$p_f=\frac{\Delta c_f(\widehat{f}, \hat{x})}{\Delta f}$

$0=\frac{\Delta c_c(\widehat{s}, \hat{x})}{\Delta x}+\frac{\Delta c_f(\widehat{f}, \hat{x})}{\Delta x}$

The number of pollution can be determined where the marginal cost (MC) is equal to 0, namely:

$\frac{\Delta c_c(s *, x *)}{\Delta x}=0$

$M C_s(s *, x *)=0$

$\frac{\Delta c_c(\hat{s}, \hat{x})}{\Delta x}+\frac{\Delta c_f(\widehat{f}, \hat{x})}{\Delta x}=0$

Studies on the implications of economic development on increasing CO₂ gas emissions have been carried out by many experts. By adopting the theoretical framework of the Solow Model on the New Growth Theory to achieve an ideal economic growth (steady-state), the mathematical derivative can be formulated as follows:

$Y(t)=\left[\left(1-\alpha_k\right)\right]^\alpha\left[A(t)\left(1-\alpha_t\right) L(t)\right]^{1-\alpha}, 0<\alpha<1]$

The increase in the production of pollutant CO₂ gas emissions due to the economic development process in the long term will affect the quality of the environment and ultimately affect the quality of life. Here, there is a causal relationship between environmental quality and the sustainability of economic development [6, 16]. In the long term, CO₂ gas emissions will also impact the quality of people's lives, thereby reducing health standards and ultimately resulting in the loss of time and funds to restore health from various diseases caused by CO₂ gas emissions. Emissions of CO₂ gas are also influenced by the country's population, where a larger population will encourage an increase in energy needs to meet economic needs in the fields of transportation, services, education, health, and others [17]. In addition, the impact of economic development on the environment, among others, is an increase in the production of CO₂ gas emissions, which affects the degradation of air quality and the social life of the community. In the long term, increased production of CO₂ gas emissions will also affect the sustainability of development because it impacts the quality of people's lives and human resources.

For this reason, environmental issues are crucial in economic development from a global perspective because of the interdependence between individuals, groups, and countries [16, 18]. Globally, increased production of CO₂ emissions will affect the greenhouse effect, cause global warming, and ultimately affect the economic and social activities of the community [19, 20]. The increase in global temperature can also cause crop failure in some areas due to the drastic changes in weather cycles. Global warming also causes sea levels to rise so that some islands are submerged, and coastal areas experience abrasion symptoms, which cause losses for residents living in coastal areas. In addition, Dell, Jones [9] investigated the impact of climate change on the agricultural sector, health, conflict in society, the trade sector, labor productivity, and economic growth. It was shown that integrated policies are needed for all stakeholders to overcome the negative impacts of climate change. Next, Kolstad and Moore [8] conducted a study on the economic impact of climate change through observations of the weather. Their findings revealed that climate change had a very significant effect on the economy in the agricultural, trade, transportation, and distribution sectors, so it is necessary to anticipate well in economic activities and take serious efforts to control the damaging effects of climate change on the economy.

Therefore, research on the determinants of CO₂ gas emissions is essential to find out the factors causing CO₂ gas emissions so that integrated policies can be formulated to overcome the negative impacts of increasing CO₂ gas emissions. The urgency of macroeconomic variables affecting CO₂ gas emissions in member countries of the ASEAN Economic Community is because the Southeast Asia region is a strategic area that determines the future of the world economy and has abundant natural resources and a large population.

Research on the determinants of CO₂ gas emissions in selected ASEAN economic community (AEC) member countries had panel data on selected ASEAN economic community (AEC) member countries between 2015 and 2019. The variables in this study included CO₂ gas emissions as the dependent variable, while population (POP), gross domestic product (GDP), foreign investment (FDI), exports (X), energy consumption (EC), and inflation (INF) as independent variables. In panel data research, the steps were to conduct the Chow test to determine whether the analysis model used a fixed or a random effect model. The next step was to carry out the Hausman test to determine whether to use the fixed-effect model or the common effect model [21]. The Chow and Hausman test results uncovered that the estimation results were not significant, so they could not explain information about the relationship between variables properly. Thus, the next step was to estimate using the corrected standard error model method to get better estimation results. Then, research on the determinants of CO₂ gas emissions in selected ASEAN economic community (AEC) member countries applied panel data analysis corrected standard error model, with estimation results as follows:

Table 1. Regression of CO₂ emissions

Source: Data processed, 2021

The empirical findings in the Table 1 above explain that CO₂ gas emissions in selected ASEAN economic community (AEC) member countries were influenced by the variables of foreign direct investment (FDI), exports (X), energy consumption (EC), and inflation (INF). The foreign investment variable (FDI) was the largest contributor to CO₂ gas emissions in ASEAN countries, with a regression coefficient of 0.1251. It means that an increase of 1 billion US dollars will increase CO₂ emissions by 0.1251%. This phenomenon is understandable, considering that foreign investment (FDI) through the manufacturing industry processes various kinds of raw materials into finished goods, causing much pollution, both water, air, and land pollution. As with other developing countries, ASEAN countries are the countries of choice for multinational company (MNC) investors to invest in various manufacturing industry sectors. With a wealth of natural resources, many workers, and political support from the government, ASEAN countries are ideal for investment. Thus, ASEAN countries, such as Vietnam, Cambodia, Laos, Malaysia, Indonesia, Thailand, and the Philippines, are competing to provide incentive facilities, both in the form of taxes and free of import duties, for several types of investment and industry. However, the impact of the large number of foreign companies in ASEAN is the main cause of the high production of CO₂ gas emissions. This empirical finding has also been pointed out by Hanley, Shogren [14] in their study of the phenomenon of economic activity - especially investment - and its impact on environmental change. They explained the need for studies to determine the balance between the benefits and costs of economic activities and their impact on environmental damage.

The export variable (X) was also causing CO₂ gas emissions, with a coefficient value of 0.0164. It indicates that a 1% increase in exports causes CO₂ emissions of 0.0164%. This fact implies that the strategy of ASEAN countries to encourage exports through manufacturing industrial products will have a polluting impact on the. It shows that many ASEAN countries' commodity exports are industrially processed products from raw or semi-finished materials into finished materials. The implication is that the demand for fuel increases, causing CO₂ emissions to increase. This empirical finding is relevant to the research results of Gouel and Laborde [3] regarding the effect of global market changes on climate change caused by CO₂ carbon gas emissions. However, their research was only on agricultural products. CO₂ emissions are triggered by investment and exports through industrialization activities. In addition to creating jobs, foreign investment (FDI) in ASEAN countries through the entry of multinational corporations (MNC) can also encourage economic growth. Nevertheless, the export-oriented industrialization strategy triggers an increase in fossil energy consumption, encouraging CO₂ gas emissions. Multinational corporations (MNC) also enter ASEAN countries due to the relatively lax environmental and industrial waste provisions compared to their home countries. Several types of industry trigger increased CO₂ emissions through land burning to prepare land for oil palm plantations, the results of which are primarily for export [5].

Specifically, Malaysia and Indonesia are the two largest countries exporting crude palm oil (CPO) in the international market. As a result, burning and CO₂ gas emissions become routine yearly to prepare new land for oil palm plantations. Therefore, in the long term, it is necessary to consider industrialization strategies in ASEAN countries to pay more attention to environmental aspects and natural balance for sustainable development [3].

ASEAN countries' energy consumption variable (EC) also significantly impacted CO₂ gas emissions. It can be seen from the magnitude of the regression coefficient value of the energy consumption variable of 0.0278, indicating that an increase in energy consumption of 1 mg will cause CO₂ emissions of 0.0278%. This reality is related to energy consumption for household needs, industry, and transportation, which continues to increase. This empirical finding is in line with the research results of Isaksen [10] on the relationship between household energy consumption, per capita income levels, and CO₂ carbon emissions in Norway. Moreover, as a developing country begins to enter the phase of an industrialized country, the consequences of energy needs will continue to increase. Energy consumption in several ASEAN countries indicates the energy needs of developing countries to support economic activities, both for household and industrial needs. Consequently, the government's electrification policy by building power plant installations and networks to support the increasing demand for electrical energy, both household and industrial, contributes to increasing energy consumption, increasing CO₂ gas emissions. In several ASEAN countries, most power plants are powered by coal, besides geothermal and hydropower. In this regard, the increasing demand for electric power for household and industrial needs has encouraged the use of coal to drive electric turbines, resulting in increased CO₂ gas emissions. Increasingly intensive industrialization to encourage economic growth in ASEAN countries has also triggered an increase in energy consumption, thereby increasing CO₂ gas emissions. In addition, energy consumption has risen due to the need for fuel to support the flow of distribution of goods and services. Human mobility then also increases energy consumption through the land, sea, and air transportation sectors, thereby also encouraging an increase in CO₂ gas emissions. Moreover, the congestion and deteriorating air quality in major cities of ASEAN countries, such as Bangkok, Jakarta, Kuala Lumpur, Manila, and Singapore, demonstrate the immense contribution of energy demand in the transportation sector in contributing to CO₂ gas emissions.

Furthermore, the inflation (INF) variable was one of the contributors to CO₂ gas emissions in ASEAN countries, with a coefficient value of -0.1542. It denotes that an increase in inflation of 1% will reduce CO₂ emissions by -0.1542 %. This economic phenomenon can be understood that the increase in the price of goods and services causes people's purchasing power to decrease, and consumption of goods will also decrease according to the law of demand; thus, it causes economic growth and energy needs to fall so that CO₂ gas emissions will also decrease. On the other hand, lower inflation will also increase the competitiveness of export products so that the production of export goods will increase and CO₂ gas emissions will increase. Likewise, falling prices will increase people's purchasing power so that demand for goods and services increases, encouraging increased production of goods and services, eventually leading to increased CO₂ emissions. Related to that, the empirical findings of Burakov [4] also explained the relationship between the inflation rate and environmental issues, where price increases were triggered by changes in world oil prices and their effects on economic growth. Here, rising inflation tends to hamper economic growth and, in the end, will inhibit CO₂ carbon emissions [14].