Structural Effects of Economic Shocks on the Macroeconomic Economy–Electricity–Emissions Nexus in India via Long-Term Cointegration Approach

Soumya Basu, Keiichi Ishihara, Takaya Ogawa and Hideyuki Okumura ()
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Soumya Basu: Graduate School of Energy Science, Kyoto University, Kyoto 606-8501, Japan
Keiichi Ishihara: Graduate School of Energy Science, Kyoto University, Kyoto 606-8501, Japan
Takaya Ogawa: Graduate School of Energy Science, Kyoto University, Kyoto 606-8501, Japan
Hideyuki Okumura: Graduate School of Energy Science, Kyoto University, Kyoto 606-8501, Japan

Energies, 2024, vol. 17, issue 17, 1-42

Abstract: For developing nations to achieve net-zero targets, macroeconomic linkages impacting the decoupling of emissions from economic growth must account for non-linear business cycles and economic shocks. This study aims to delineate decarbonization policy pathways for the Indian electricity sector in the aftermath of COVID-19 by analysing the long-term evolution of the economy–electricity–emissions (3E) nexus during the 2008 financial crisis and during COVID-19, covering the period of 1996Q2 to 2020Q3. Upon testing multiple theoretical 3E systems, it was found that a model internalizing trade, inflation, and stochasticity was able to minimize the reproduction errors from growth to recession phases, as well as predict the rebound effect from an economic crisis. This was revealed to be due to more information within the coefficients in a trade stochastic model. Our results confirm the existence of electricity-associated emission decoupling with capital formation in the long-run, post-crisis, while economic growth and inflation increase CO 2 emissions. The main finding highlights the negative feedback loop of inflation->trade->emissions, which shows that GDP and emissions are not directly causal. This long-run macroeconomic dynamic death spiral causes decoupling to be inhibited, where fossil fuel imports should not be subsidized for economic shock rebound, and the risk hedging of energy transition investments should occur in the post-COVID-19 era.

Keywords: decoupling; business cycles; inflation; COVID-19; stochastic modelling; approximate entropy (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2024
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