The technical decomposition of carbon emissions and the concerns about FDI and trade openness effects in the United States

Abstract

This paper decomposes the environmental Kuznets curve into the scale, technique and composition effects while incorporating the roles of energy consumption, trade openness and foreign direct investments (FDI) effects in a carbon emissions function for the United States (U.S.). We have incorporated information about unknown structural breaks into this function while investigating the cointegration between the related variables. The empirical results confirm the existence of cointegration between the variables in the presence of structural breaks. Moreover, the scale effect increases carbon dioxide emissions, but the technique effect reduces it as expected. Energy consumption also adds to carbon emissions, while the composition effect improves environmental quality by lowering carbon dioxide emissions. Further, trade openness decreases carbon dioxide emissions. However, increases in FDI hamper environmental quality by increasing carbon emissions. To reduce the level of carbon emissions, the technical processes of production should be improved by investing in technological innovations and capital stock and upgrading environmental regulations to channel in environment-friendly FDIs. There should also be a transformation of the energy consumption structure towards cleaner energy sources. © 2019 CEPII (Centre d'Etudes Prospectives et d'Informations Internationales), a center for research and expertise on the world economy