Impact of Energy Consumption on Economic Growth, Foreign Direct Investment and Environmental Degradation: Evidence from Pakistan


  • Shabana Parveen Assistant Professor, Department of Economics, Hazara University, Mansehra, Pakistan
  • Bibi Aisha Sadiqa Assistant Professor, Department of Economics, Hazara University Mansehra, Pakistan
  • Farrah Yasmin Assistant Professor of Economics, Govt. Emerson College Multan, Pakistan
  • Sher Ali Assistant Professor, Department of Economics, Islamia College Peshawar, Pakistan



Energy Use, Economic Growth, Foreign Direct Investment, CO2 emissions, Pakistan


Economic growth is a process that is not possible without a lot of energy consumption. Energy is considered as the life blood of an economy however, the energy consumption is also an important factor responsible for degrading the natural environment of the world. The present empirical work is an effort to empirically analyze the association of energy use (kg of oil equivalent per capita) with economic growth (GDP per capita annual growth), foreign direct investment (FDI net inflow as percentage of GDP), and environmental degradation (CO2 emissions, metric tons per capita) in case of Pakistan. The work is based on time series data for the years 1975 to 2018. Canonical cointegrating regression (CCR) method is used for the estimation of the coefficient of the  parameters. The results demonstrate that  energy use has  significant positive association with  FDI, economic growth,  and CO2 emissions. The empirical results recommend that policy makers in Pakistan require to work on policies regarding sustainable development and efficient use of energy as without achieving the efficiency in energy use, the desirable growth of the economy without environmental degradation cannot be achieved.


Abdouli, M, & Hammami, S. (2017a). The impact of FDI inflows and environmental quality on economic growth: an empirical study for the MENA countries. Journal of the Knowledge Economy 8(1): pp. 254–278.

Abdouli, M., & Hammami, S. (2017b). Exploring links between FDI inflows, energy consumption, and economic growth: further evidence from MENA countries. Journal of Economic Development, 42(1): pp. 95–117.

Ahmed, M., & Azam, M. (2016). Causal nexus between energy consumption and economic growth for high, middle and low income countries using frequency domain analysis. Renewable and Sustainable Energy Reviews, 60: pp. 653-678.

Alfaro, L., Chanda, A., Ozcan, K. S., & Sayek, S. (2010). Does foreign direct investment promote growth? Exploring the role of financial markets on linkages. Journal of Development Economics 912: pp.242–256.

Alper, A., & Oguz, O. (2016). The role of renewable energy consumption in economic growth: Evidence from asymmetric causality. Renewable and Sustainable Energy Reviews, 60: pp.953-959.

Alshehry, A. S., & Belloumi, M. (2015). Energy consumption, carbon dioxide emissions and economic growth: The case of Saudi Arabia. Renewable and Sustainable Energy Reviews, 41: pp. 237-247.

Amri, F. (2017). Carbon dioxide emissions, output, and energy consumption categories in Algeria. Environmental Science and Pollution Research, 24(17): pp.14567– 14578.

Anwar, S., & Nguyen, L. P. (2010). Foreign direct investment and economic growth in Vietnam. Asia Pacific Business Review, 16. Pp. 83–202.

Ang, J, B. (2007). CO2 emissions, energy consumption, and output in France. Journal of Energy Policy, 35: pp. 4772-4778.

Apergis, N., & Payne, J. (2009). CO2 emissions, energy usage and output in Central America. Energy Policy 37: pp.3282–3286.

Apergis, N., & Payne, J. E. (2010). Energy consumption and growth in South America: Evidence from a panel error correction model. Energy Economics, 32(6): pp.1421-1426.

Azam, M., Khan, A. Q., & Ozturk, I. (2019). The effects of energy on investment, human health, environment and economic growth: empirical evidence from China. Environmental Science and Pollution Research (2019) 26: pp.10816–10825.

Bekhet, H.A., & Othman, N.S. (2011). Causality Analysis among Electricity Consumption, Consumer Expenditure, GDP and Foreign Direct Investment FDI: Case Study of Malaysia. Journal of Economics and International Finance, 3: pp. 228–235.

Bento, J.P. (2011). Energy savings via foreign direct investment?- Empirical evidence from Portugal. WorkinPaper No. 2011/24, Maastricht School of Management.

Braun, R. A. (1994). How large is the optimal inflation tax? Journal of Monetary Economics, 34: pp. 201–214.

Danmaraya, I. A., & Hassan, S. (2016a). Electricity consumption and manufacturing sector productivity in Nigeria: An ARDL-bounds testing approach. International Journal of Energy Economics and Policy, 6(2): pp. 1-7.

Danmaraya, I. A., & Hassan, S. (2016b). Energy consumption and manufacturing performance: Evidence from panel data for low-income Sub-Sahara African countries. International Energy Journal, 16(2): pp.57-64.

Dickey, D., & Fuller, W. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74: pp. 427–431.

Gul, S., Zou, X., Hassan, C. H., Azam, M., & Zaman, K. (2015). Causal nexux between energy consumption and carbon dioxide emission for Malaysia using maximum entropy bootstrap approach. Environmental Science and Pollution Research 22(24): pp. 19773–19785.

Hsiao, C., & Shen, Y. (2003). Foreign direct investment and economic growth: the importance of institutions and urbanization. Economic Growth and Cultural Change 51: pp. 883–896.

Jalil A, Mahmud, S. F. (2009). Environment Kuznets curve for CO2 emissions: a cointegration analysis for China. Energy Policy 37: pp. 5167–5172.

Jebli, M. B., Youssef, S. B., & Apergis, N. (2015). The dynamic interaction between combustible renewables and waste consumption and international tourism: the case of Tunisia. Environmental Science & Pollution Research, 22: pp.12050–12061.

Jebli, M. B., & Youssef, S. B. (2015). The environmental Kuznets curve, economic growth, renewable and non-renewable energy, and trade in Tunisia. Renewable & Sustainable Energy Reviews, 47: pp.173–185.

Johansen, S. (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica 59: pp. 1551–1580.

Johansen, S. (1995). Likelihood-based inference in cointegrated vector autoregressive models. Oxford University Press, New York.

Kivyiro, P., & Arminen, H. (2014). Carbon dioxide emissions, energy consumption, economic growth, and foreign direct investment: Causality analysis for Sub-Saharan Africa. Energy, 74: pp. 595-606.

Kraft, J., & Kraft, A. (1978). Relationship between energy and GNP. Journal of Energy Development, 3(2): pp. 401-403.

Li, H., Li, B., & Lu, H. (2017). Carbon dioxide emissions, economic growth, and selected types of fossil energy consumption in China: empirical evidence from 1965 to 2015. Sustainability 9 (697): pp.1–14

Liu, X., & Bae, J. (2018). Urbanization and industrialization impact of CO2 emissions in China. Journal of Cleaner Production, 172 : pp.178-186.

Lotfalipour, M. R., Falahi, M. A., & Ashena, M. (2010). Economic growth, CO2 emissions, and fossil fuels consumption in Iran Energy, 35: pp.5115-5120.

Iyke, B. N. (2015). Electricity consumption and economic growth in Nigeria: A revisit of the energy-growth debate. Energy Economics, 51: pp.166-176.

Mielnik, O., & Goldemberg, J. (2000). Converging to a common pattern of energy use in developing and industrialized countries’, Energy Policy, 28: pp. 503–508.

Nguyen, A.N., & Nguyen, T. (2007). Foreign direct investment in Vietnam: an overview and analysis of the determination of spatial distribution, Development and polices research center, Working Paper, Hanoi, Vietnam.

Odhiambo, N. M. (2014). Energy dependence in developing countries: Does the level of income matter? Atlantic Economic Journal, 42(1): pp. 65-77.

Oh, W., & Lee, K. (2004). Energy consumption and economic growth in Korea: Testing the causality relation. Journal of Policy Modeling, 26(8): pp. 973-981.

Omri, A., & Kahouli, B. (2014). Causal relationships between energy consumption, foreign direct investment and economic growth: fresh evidence from dynamic simultaneous-equations models. Energy Policy 67: pp. 913–922.

Omri, A. and Kahouli, B. (2013). The nexus between foreign investment, domestic capital and economic growth:Empirical evidence from the MENA region. Research in Economics, DOI

Ouedraogo, N. S. (2013). Energy consumption and economic growth: Evidence from the economic community of West African States (ECOWAS). Energy Economics, 36: pp. 637-647.

Ozturk, Z., & Oz, D. (2016). The relationship between energy consumption, income, foreign direct investment, and CO2 emissions: the case of Turkey. Journal of Faculty of Econmics and Administrative Science 6(2): pp. 69–288.

Park, J. Y. (1992). Canonical cointegrating regressions. Econometrica 60(1): pp.119–143.

Peng, H., Tan, X., Li, Y., & Hu, L. (2016). Economic growth, foreign direct investment and CO2 emissions in China: a panel granger causality analysis. Sustainability 8(233): pp. 1–13.

Phillips, P. C. B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika 75(2): pp. 335–346.

Rafindadi, A. A., & Ozturk, I. (2016). Effects of financial development, economic growth and trade on electricity consumption: Evidence from Post-Fukushima Japan. Renewable and Sustainable Energy Reviews, 54: pp.1073-1084.

Rahman, M. S., Junsheng, H., Shahari, F., Aslam, M., Masud, M.M., Banna, H., & Liya, M. (2015). Long-run relationship between sectoral productivity and energy consumption in Malaysia: An aggregated and disaggregated viewpoint. Energy, 86: pp. 436-445.

Rapu, C, S., Adenuga, A. O., Kanya, W. J., Abeng, M. O., Golit, P. D. , Hilili, M. J., Uba, I. A., & Ochu, E. R. (2015). Analysis of Energy Market Conditions in Nigeria Occasional Paper No. 55 Central Bank of Nigeria.

Sadorsky, P. (2010). The impact of financial development on energy consumption in emerging economies. Energy Policy, 38: pp. 2528–2535.

Skanderson, D. M. (1994). Evidence on the fisher equation: the long run and the short run, PhD Dissertation. University of Rochester, Rochester, New York.

Solarin, S.A., & Ozturk, I. (2016). The relationship between natural gas consumption and economic growth in OPEC members. Renewable and Sustainable Energy Reviews, 58: pp. 1348-1356.

Sriyana, J. (2019). Dynamic Effects of Energy Consumption on Economic Growth in an Emerging Economy. International Journal of Energy Economics and Policy, Econ journals, 9(4): pp.283-290.

Stern, D. I., & Enflo, K. (2013). Causality between energy and output in the long-run. Energy Economics, 39: pp.135-146.

Tang, C. F., Tan, B. W., & Ozturk, I. (2016). Energy consumption and economic growth in Vietnam. Renewable and Sustainable Energy Reviews, 54: pp. 1506-1514.

Toman, M., & Jemelkova, B. (2003). Energy and economic development: an assessment of the state of knowledge. Discussion paper: pp. 03–13.

World Energy Outlook (2004). Chapter 10, energy and development. IEA Publications, Paris: pp. 329–365.

Zeren, F. (2015). The impact of foreign direct investment on CO2 emission: pollution halo or pollution haven hypothesis? Journal of Yasar University, 10(37): pp. 6442–6448.

Zhang, K. H., (2001). Does Foreign Direct Investment Promote Economic growth? Evidence from East Asia and Latin America. Contemporary Economic Policy, 19: pp. 175-185.

Zhang, X. P., & Cheng, X. M. (2009). Energy consumption, carbon emissions and economic growth in China. Ecological Economics, 68: pp. 2706-2712.

Zhang, Y. J. (2011). The impact of financial growth on carbon emissions: an empirical analysis in China. Energy Policy 39: pp. 2197–2203.

Ziramba, E. (2009). Disaggregate energy consumption and industrial production in South Africa. Energy Policy, 37(6): pp. 2214-2220.




How to Cite

Parveen, S. ., Sadiqa, B. A. ., Yasmin, F. ., & Ali , S. . (2021). Impact of Energy Consumption on Economic Growth, Foreign Direct Investment and Environmental Degradation: Evidence from Pakistan. Review of Applied Management and Social Sciences, 4(1), 13-25.