Environment, Development and Sustainability

https://doi.org/10.1007/s10668-021-01716-2

The nexus between urbanization, renewable energy

consumption, financial development, and ­CO2 emissions:
evidence from selected Asian countries

Ahsan Anwar1,2 · Avik Sinha3 · Arshian Sharif4,5 · Muhammad Siddique1 ·

Shoaib Irshad6 · Waseem Anwar7 · Summaira Malik8

Received: 19 June 2020 / Accepted: 7 July 2021

© The Author(s), under exclusive licence to Springer Nature B.V. 2021

Abstract
In terms of attaining the objectives of Sustainable Development Goals (SDGs), the Asian
economies are considered as laggards, and one of the major problems faced by these
economies is the issue of environmental degradation. For addressing this pertaining issue,
a policy-level reorientation might be necessary. In this view, this study aims to explore
the impact of urbanization, renewable energy consumption, financial development, agri-
culture, and economic growth on ­CO2 emissions in 15 Asian economies over 1990–2014.
The empirical evidence demonstrates that urbanization, financial development, and eco-
nomic growth increase C ­ O2 emissions, renewable energy consumption reduces C ­ O2 emis-
sions, and the impact of agriculture is insignificant. Impulse response function and vari-
ance decomposition techniques are used to test the causality among the variables. Based
on the study outcomes, a comprehensive SDG-oriented policy framework has been recom-
mended, so that these economies can make progression toward attaining the objectives of
SDG 13 and SDG 7. This study contributed to the literature by recommending this SDG-
oriented policy framework, which encapsulates economic growth and its drivers.

Keywords Urbanization · Renewable energy consumption · Financial development · CO2

emission · SDG

1 Introduction

While treading along the economic growth trajectory, attainment of the developmental
path creates the divide between the nations, and this divide is reflected in terms of the
developmental policies being adopted in those nations. For the developed nations, the poli-
cymakers might be more interested toward improving the living standard of the citizens by
upholding the development quality of the nations, while on the other hands, policymak-
ers of the developing nations will be more interested in accomplishing economic growth
even notwithstanding the sustainable development. Therefore, for the latter case, a classic

* Ahsan Anwar
[email protected]
Extended author information available on the last page of the article

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 A. Anwar et al.

trade-off between growth and development can be seen. If the latest Sustainable Devel-
opment Goals (SDG) progress report is analyzed, then it can be seen that the developing
nations are demonstrating poor performance, compared to their developed counterpart in
various fronts, and climate action is major among them (UNESCAP, 2021). This report
reiterated the environmental concerns raised by the United Nations, during the assessment
of the environmental SDGs (UNESCAP, 2020). The prevailing economic growth trajectory
in these nations is not environmentally sustainable, as economic growth pattern of these
nations is largely dependent on the fossil fuel-based solutions. Therefore, these nations are
finding it difficult to recalibrate the existing policies for attaining the objective the climate
action, which falls under SDG 13. While drawing the reference of SDG 13, the Asian econ-
omies need special mention, as these economics are considered as the laggards in terms
of attaining the SDG objectives. In the 2019 baseline Poverty Eradication report, World
Bank has attributed environmental degradation to be one of the major hindrances on the
way to achieve economic development in Asia (Fallesen et al., 2019). Given this contextual
setting, policy reorientation is essential in the Asian countries, so as to avoid the climatic
vulnerability of the economic growth and ensure sustainable development. The concern of
the International Monetary Fund in this regard can be felt in the work of Prakash (2018),
who also has stressed on the policy realignment aspect for these economies. This prevail-
ing policy-level void gives the primary rationale for conducting the present study.
During treading along this economic growth trajectory, these economies are experienc-
ing a surge in the job opportunities, because of which the urban regions in these economies
are undergoing an anthropogenic transition. This transition can be referred to as urbaniza-
tion, which is caused by the demand of labor force created by the rapid industrial activities.
This shift of the labor force toward the urban areas has catalyzed the energy demand to
escalate, and this escalation has consequentially given rise to the rise in ambient air pol-
lution. While describing the economic inequality prevailing in these nations, the issue of
unsustainable urbanization has been discussed in the Human Development Report 2019,
and the problem of rising C ­ O2 emissions has also been attributed to the rising urbanization
(UNDP, 2019). Now, in order to cater to the rising demand of energy in the urban areas,
and at the same time, to protect and improve the environmental quality, these nations are
exploring the potential of the renewable energy solutions. The latest Energy Target Assess-
ment report of International Energy Agency has stressed on the discovery and diffusion
of renewable energy solutions for achieving energy security and improving environmental
quality in the Asian countries (Kristiansen and Arboleya, 2021). Now, this report has also
mentioned about investment in the renewable energy generation systems by creating ade-
quate financialization channels. These new financialization channels might help in boosting
the development and deployment of domestic renewable energy systems, while the existing
channels are more prone toward boosting the industrialization and consequential environ-
mental degradation. The report by Asian Development Bank on Green Energy Financing in
Asian economies has focused on this particular issue for the South Asian economies (Pei-
mani, 2018). In such a scenario, this gives a clear indication that the existing policy frame-
work in the Asian economies might create a predicament in achieving the energy solutions
to be clean and affordable, i.e., the objectives of SDG 7. Realignment of urban develop-
ment policies, energy policies, and financialization channels might be able to show a way
to attain the SDG objectives by 2030 for these economies. This particular SDG-oriented
policy design purpose gives the second rationale of the present study.
While these nations are trying to achieve economic growth by means of rapid indus-
trialization, a major share of the income generation in these nations comes from the agri-
cultural activities. These nations faced the issue of food crisis, and for reviving from that

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The nexus between urbanization, renewable energy consumption,…

problem, policymakers of these nations have embarked on the innovative practices for
ensuring sustainable agriculture. However, in order to enhance the productivity of the agri-
cultural activities, deforestation started to increase in these nations, and displacement of
natural habitat started to increase. While analyzing deforestation in the South East Asian
countries, the European Parliamentary Research Service has stressed on the community
farming activities, and it has also been mentioned that in pursuit of achieving agricultural
productivity, these nations have in turn started degrading the environmental quality (Rus-
sell, 2020). Therefore, in order to attain the objectives of SDG 13, the policymakers of
these nations need to look into the pattern of agricultural activities, so that the negative
environmental externalities exerted by these activities can be internalized through the
policy redesign. This agriculture-focused climatic policy design purpose gives the third
rationale of the present study.
Given this persisting policy-level problem in the Asian economies, it becomes impera-
tive how to realign the existing policies in these nations for attaining the SDG objectives
by 2030. Following the rationales discussed, it is evident that in order to tackle the cli-
matic problem in these nations, policy realignment will be necessary at different levels
and involving various stakeholders. Herein lies contribution of the present study. A multi-
pronged SDG-oriented policy realignment has been recommended in this study for the
Asian economies, so that they can adhere to the Agenda 2030. In order to achieve this
research objective, 15 Asian economies have been chosen, and the study spans from 1990
to 2014. Considering the case of Asian economies can bring forth the aspect of generaliza-
bility of the policy framework recommended in this study, as this particular framework can
be perceived as a benchmark approach for other emerging nations, which are also encoun-
tering the issue of environmental degradation. While the academic literature has focused
on the association between these aspects over a long stint, no policy-level convergence has
been achieved through those studies, and the present study aims at achieving that policy
convergence by recommending an SDG-oriented policy framework for realizing the aims
of SDG 13 and SDG 7. By means of this framework, this study contributes to the literature
at the policy level.
Robust design of this framework needs controlling of the potential operational issues
present in the dataset. As these economies are associated with each other via economic and
trade spillovers, it can be expected that cross-sectional dependence and panel heterogene-
ity might be present in the data. Therefore, the methodological adaptation should be able
to take account of this issue. In this pursuit, fully modified ordinary least square (FMOLS)
technique has been adopted in this study. The FMOLS can overcome the problems of
cross-sectional heterogeneity, endogeneity, and serial correlation (Xie et al., 2020). This
can ensure the methodological complementarity in regard to the study objective. There lies
the analytical contribution of the study.

2 Literature review

More than a few empirical investigations inspected the connections among the carbon
emission and different factors, for instance, urbanization, income, renewable energy utiliza-
tion, financial development, and agriculture (Balcilar et al., 2018; Chien et al., 2021; Jun
et al., 2021; Sinha, 2019). A few factors indicated positive roles of emission, while others
indicated the negative side. The conflicting outcomes principally rely upon the use of vari-
ous data sets, methodologies, countries, qualities, and timespans (Adewuyi and Awodumi,

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 A. Anwar et al.

2017; Sinha et al., 2019b; Anwar et al., 2021a). In Pakistan’s case, over the period from
1990 to 2014, Waheed et al. (2018) indicated that renewable energy usage is negative,
whereas agriculture activities are positively related to CE. Using a global panel of 102
economies, Le et al. (2020) found green energy reduces emission in high-income countries.
They suggested that the negative association in developed countries is due to these econo-
mies’ strong environmental policies. Similarly, by using the panel cointegration technique,
Dogan and Seker (2016) analyzed that green energy mitigates carbon emanation in Euro-
pean Union during 1980–2012. Cheng et al. (2019) explored that in the case of BRICS
economies during 2000–2013, green energy reduces pollutant emission. For Africa during
the period 1990–2014, Nathaniel & Iheonu (2019) explored unidirectional causality exist-
ing from green energy to C ­ O2 emission.
Parshall et al. (2010) explored that urbanization significantly influencing CE and envi-
ronmental health in China and the USA. Hossain (2011) found similar outcomes in their
studies on the United States of America and newly industrialized countries. Furthermore,
Al-Mulali et al. (2012), Xie et al. (2020), and Yu et al. (2020) scrutinized that urbanization
stimulates energy consumption, which adversely affects the environment in lower-income
economies. They also explored that faster urbanization increased more labor supply, which
boosted overall energy consumption in China and affected carbon emissions. Moreover,
Zhu et al. (2012) discovered the inverted U-curve association between CE and urbanization
in twenty emerging economies.
Ali et al. (2017) explored the adverse influence of urbanization on CE. They utilized
the data of Singapore during 1970–2015. They suggested that the leading cause behind
such negative association is effective environmental policies in Singapore. Similar results
were found for 19 emerging countries by Saidi and Mbarek (2017), they believed that
urbanization is not responsible for environmental pollution. In a panel study of 69 nations,
Sharma (2011) found an insignificant association between urbanization and environmental
pollution.
Many studies have been found the progressive influence of economic growth on CE such
as Anwar et al. (2021b), Alam et al. (2007), Al-Mulali et al. (2015), and Zafar et al. (2019).
In the modern era of development, it has been observed that people are not paying attention
to protect environmental health. In common practice, the consumption of fossils fuels is a
big source of C ­ O2-emission, which is heavily augmented by economic growth. However,
research debates are still there among the researchers about the role of various economic
indicators on environmental degradation and health issues that can affect emerging coun-
tries’ economic growth (Pao & Tsai, 2011; Baek, 2016; Bakhsh et al., 2017; Hanif, 2018;
Koengkan, 2018). Evidence of a comprehensive review of this association can be found in
the work of Shahbaz and Sinha (2019).
Acheampong (2019) stated that the financial sector provides easy loan facilities to pro-
mote the industrial sector, which has become a cause of industrial pollution and environ-
mental deterioration. Using the data of 24 transition nations during 1993–2004, Tamazian
& Rao (2010) explored that the financial sector performs a vital role in protecting the
environment by providing low-cost loans to green technology industries. By applying the
ARDL technique on the Indian economy, Boutabba (2014) explored that FD has a hostile
influence on the quality of the environment. A similar finding found for 23 European econ-
omies by Al-Mulali et al. (2015) investigated that environmental deterioration increases
with the financial sector’s development. Using Pakistan’s data during 1971–2011, Shahzad
et al. (2017) investigated that carbon emanation and financial development are positively
connected. For France during 1955–2016, Shahbaz et al. (2018) claimed that FD reduces
pollution.

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The nexus between urbanization, renewable energy consumption,…

Funk & Brown (2009) stated that the agriculture sector provides food to the masses. It
also serves as a significant source in expanding the economy. Johnson et al. (2007) stated
that farming activities release a substantial amount of GHG into the air, augmented by the
land organization. Numerous studies have documented the causes of pollution of the agri-
cultural sector and the approaches to alleviate its impression. Asumadu-Sarkodie & Owusu
(2017) have documented that different crops such as rice, cereal, other biomass-burned
crops are the principal sources of C­ O2-emission. He also concluded that modern machin-
ery in the agriculture sector is helpful to reduce ­CO2-emission. The emission of green-
house gas from the agricultural sector has been doubled during the past 50 years, from
1961 to 2011 (Food and Agriculture Organisation, 2014).
The literature, as mentioned earlier, provides mix and conflicting empirical outcomes.
Numerous studies claimed that urbanization increases environmental pollution (Yu et al.,
2020; Xie et al., 2020; Al-Mulali et al., 2012). A few studies documented that urbanization
upsurge environmental quality (Saidi and Mbarek, 2017; Ali et al., 2017). While Sharma
(2011) suggested, no link exists between urbanization and the environment. Similarly,
several studies documented that financial development mitigates carbon emissions (Shah-
baz et al., 2018; Tamazian & Rao, 2010), whereas several studies indicated that financial
development increases environmental pollution (Acheampong, 2019; Shahzad et al., 2017).
From the above discussion, a clearer understanding of the relationships among urbaniza-
tion, financial growth, income, and C ­ O2 emissions is required that helps policy analysts
and government officials envision policies for addressing the problem of climate change.
Therefore, this study looks at the role of urbanization, financial development, and renew-
able energy on C­ O2 emissions for selected South Asian economies.

3 Empirical framework

3.1 Theoretical underpinning

As the fossil fuel-based energy is a key stimulus to economic growth in the Asian econo-
mies, the prevailing energy consumption pattern exerts a negative environmental externality
in these economies. Now, the rising economic growth in these economies has resulted in a
rise in the job opportunities. Hence, in anticipation of a better living standard, urban centers of
these economies have experienced a rise in the migration of population from the rural areas.
This gradual rise in the urban population has exerted a pressure on the urban infrastructure.
With the rise in urban population, though overall income level rises, living standard increases
disproportionately, as difference between skilled and unskilled labors enhances the income
inequality. Consequently, the slums and shadow cities start forming, and the people living in
these areas largely lack the access to clean cooking fuels. Hence, the level of emission rises in
the urban centers and the peripheral areas. However, the overall rise in income gives rise to the
demand of durables and consumables, which in turn is translated into rise in the level of agri-
cultural and manufacturing production. Now, in order to boost these two production activities,
the respective governments in these nations need to mobilize the finances, so that these sectors
can have more access to the factors of production. In order to boost the agricultural activities,
demand for arable lands largely results in deforestation activities, which subsequently affects
the internalization of negative environmental externalities. On the other hands, as the Asian
economies are largely dependent on energy-intensive industries, rise in the production level
causes rise in the level of emissions. With a view to address this issue of rising emission levels

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 A. Anwar et al.

and to comply with the objectives of Agenda 2030, policymakers start emphasizing on the
utilization of renewable energy solutions. Though the Asian countries are behind their devel-
oped counterpart, it can be expected that the development and diffusion of these renewable
energy generation technologies across the nations might start coopting the adverse ecological
externalities wielded by the prevailing economic growth trajectory. Therefore, encountering
the environmental degradation issue in these nations needs the formulation of a policy frame-
work encompassing these impacts.
Taking a cue from this brief discussion, an assumption can be made that the course of
economic growth in the Asian countries is wielding an ecological pressure by creating ambi-
ent air pollution. Hence, it can be said that the economic growth and its potential drivers are
­ O2 emissions in the Asian economies. In continuation to this argu-
accountable for surge in C
ment, functional form of this association can be hypothesized as:
CEi,t = f(Ubi,t , RECpi,t , FDi,t , EGi,t , Agi,t ) (1)
Here, ­CO2-emission is represented as CE, urbanization as Ub, renewable energy consump-
tion as RECp, financial development as FD, agriculture as Ag, and economic growth as EG.
Following the functional form in Eq. 1, the empirically testable version of the model can be
represented as per the following:
CEit = β0 + β1 Ubit + β2 RECpit + β3 FDit + β4 EGit + β5 Agit + εit (2)

3.2 Data

The present study explores the effects of urbanization, renewable energy consumption, finan-
cial development, agricultural productivity, and economic growth on ­CO2 emissions in 15
Asian economies (China, Indonesia, Vietnam, Sri Lanka, Malaysia, Turkey, Mongolia, Indo-
nesia, Thailand, Iran, India, Nepal, Philippine, Jordan, Pakistan). The data of CO2 emissions
in kilo ton per capita, percentage of total urban population, renewable energy consumption
as percentage of total energy consumption, amount of domestic credit to private sector as
a percentage of GDP (in constant 2010 USD), agriculture value-added/worker (in constant
2010 USD) and GDP per capita (in constant 2010 USD) for 1990–2014 are gathered from the
World Development Indicators (World Bank, 2019). Trend of the variables is shown in Fig. 1.
Just to give an overview of the chosen countries, population of these 15 countries is almost
2.7 billion, which is nearly 35% of the world population (World Bank, 2019). The GDP of
these countries was 2.753 trillion dollars in 1990, which increased almost nine times and
reached 18.733 trillion dollars in 2018 (World Bank, 2019). According to world development
indicators, these 15 countries produce 42% of the world’s total ­CO2 emissions (World Bank,
2019).

3.3 Methodology

3.3.1 Unit‑root tests

The unit-root test is reflected as an ordinary measure in the time-series analysis (Chang,
2010). Therefore, it is claimed that individual unit-root tests do not explain the determi-
nation of separate regression errors across each cross section. Furthermore, Levin et al.
(2002) give the concept of panel unit-root test that can move freely across the sections

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The nexus between urbanization, renewable energy consumption,…

CO2 Emissions Financial Development

12.2 4.2

12.0
4.0
11.8

11.6 3.8

11.4 3.6
11.2
3.4
11.0

10.8 3.2
92 94 96 98 00 02 04 06 08 10 12 14 92 94 96 98 00 02 04 06 08 10 12 14

Renewable Energy Consumption per capita Urbanization

3.3 3.9

3.2 3.8

3.1 3.7

3.0 3.6

2.9 3.5

2.8 3.4
92 94 96 98 00 02 04 06 08 10 12 14 92 94 96 98 00 02 04 06 08 10 12 14

GDP gper capita Agriculture Value Added

8.2 8.1

8.0
8.0
7.9
7.8 7.8

7.6 7.7

7.6
7.4
7.5

7.2 7.4
92 94 96 98 00 02 04 06 08 10 12 14 92 94 96 98 00 02 04 06 08 10 12 14

Fig. 1  Trend of the variables

to produce pooled t-statistics and permits trend and intercept coefficients. Thus, Levin
Lin Chu (LLC) unit-root test elaborates superior estimation as contrast to ordinary panel
unit-root tests by considering null hypothesis (­ H0); individual time-series has a unit-root
problem, and alternative hypothesis ­(H1); individual time-series is stationary (Akhmat
et al., 2014; Niu et al., 2011). Moreover, the lag operator (ohm- Ω) allows the variation
across the cross sections. Finally, above-mentioned technique is followed in the given
steps;
In step I, Augmented Dickey–Fuller (ADF) test is applied for individual cross sec-
tions on the given equation;

(3)

where t = 1,….,T and i = 1,….,N,

In step II, we use two auxiliary regression equations:
1) ∆¥i,t on ∆ i,t−L and d­ m,t, and get ἕit (estimated residuals) and,
2) i,t−1 on ∆ i,t−L and d­ m,t, and acquire residual ὒi,t−1.
In step III, we obtain standardized-residuals, using the following;

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 A. Anwar et al.

𝜀��i,t = 𝜀i,
̂ t∕� O𝜂it (4)

𝜐̂ i,t−1 = 𝜐̂ i,t ∕� O𝜇it (5)

where Ὸµit:standard-error (SE) in separate ADF-tests.

At the end, the pooled-OLS is run by using the following:

𝜀��i,t = Ω̂𝜐i,t−1 + 𝜀it (6)

The null hypothesis is Ω = 1. Therefore, Levin et al. (2002) proffer that the LLC test
needs to correct the value of t-statistics by using the sufficient conditions of ­(NT)1/2/T →
0 and (­NT)1/2/T → k. Previous research studies emphasize that the LLC test is handy for
large panels if statistics range from 5 to 250 for T and 10 to 250 for N. Smaller the value
of T smaller will be the power of a unit-root test, as the panel is undersized. While the
larger value of T confirms to estimate unit-root for each cross section separately. However,
LLC test has some disadvantages. First, this test restricts the logic that its null hypothesis
(H0) nullifies the perception regarding the unit-root problem of cross sections. The second
drawback of the LLC test is that this test statistics undertakes the panel is cross-sectional
autonomous. Consequently, to evade the LLC unit-root test’s weaknesses, the Breitung
panel- unit (BPU) test is also employed (Breitung, 2002).

3.3.2 Panel cointegration tests

In this study, the panel cointegration tests are used to explore the long-run association
among the given factors. In doing so, the null hypothesis ­(H0) is used as "no cointegra-
tion" (i.e., Pedroni, 1999; Kao, 1999; Groen & Kleibergen, 2003), while, Maddala & Wu
(1999) and Westerlund (2007) takes into account "cointegration" as null hypothesis (­H0).
The present study analysis utilizes three different panel cointegration methods presented by
Pedroni (2004).
Pedroni (1999, 2004) suggests seven diversified statistics to test cointegration. These
proposed tests have been suggested to correct for biasness in endogenous regressors and
regarded as into between and within-dimension-statistics. Between-dimensions-statistics
are known group mean panel cointegration, while within-dimensions-statistics are taken as
panel cointegration only. These cointegration tests depend upon two steps extension, resid-
ual-based procedure, suggested by Engle-Granger (1987). First, a seven steps test statistics
strategy follows assessment and provisions the residuals.
The proposed-model characterizes the following test equation:
Xi,t = a0i + ri t + b1i Z1i,t + ⋯ bmi Zmi,t + mit (7)
where, m = 1 to M, t = 1 to T, and i = 1 to N.
T: total observations and N represent, total units of cross section in panel, respectively,
and M is total number of regressors. 𝛼0i:is fixed effects or parameter of specific intercept
which fluctuates across separate cross-sectional units. The similar is correct for time effect
and slope-coefficients (­ hit) which is used in third step.
First difference of each cross section is taken to evaluate the residuals of differenced of
regression in second step:

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The nexus between urbanization, renewable energy consumption,…

Dxit = q1i DZ1i,t + ⋯ + qmi DZmi,t + hit (8)

In third step, we obtain ­K211,i: the long-run variance from residuals (­ hit).
In the fourth step, we get an appropriate auto-regressive model using residuals ­(mit) of
the actual cointegration equation.
Finally, the seven-panel cointegration tests (as suggested by Pedroni, 2004) are esti-
mated with suitable mean and variance terms.

1. ʋ-statistics (Panel):�
√ ∑N ∑T −2 2 �−1
 Zv, N & T = T N 3
2
δ μ
i=1 t=1 11i it−1
2. rho(p)-statistics (Panel):
�−1 ∑ ∑
 Zp, N, T =T 2 N 3 ∑N ∑T δ−2 μ2 δ−2 (μ1 Δ µit—γi).
√ � N T
i=1 t=1 11i it−1 i=1 t=1 11i it−1
3. 3. t-statistics (Panel nonparametric):
� �− 1
N 2 N T
  2 ∑ −2 2 ∑∑ −2
� 1 �
Zp , N, T = 𝜎 𝛿11i 𝜇it−1 𝛿11i 𝜇it−1 Δ𝜇it − 𝛾i
i=1 i=1 t=1
4. t-statistics ((Panel-parametric):
� �− 1
N T 2 N T
  −2 2 −2
� ∗1 �
z∗ t, N, T = 𝜍(N,T)
2
𝜇it−1 − Δ𝜇it∗
∑ ∑ ∑∑
𝛿11i 𝜇it−1 𝛿11i
i=1 t=1 i=1 t=1
5. rho (p)-statistics (Group):
 Zp, N, T = T1 ∑N (∑T μ2 )−1 (μ1 Δ µit−γi).
i=1 t=1 it−1 it−1
N2
6. t-statistics (Grouped nonparametric):
−1 ∑
 Zt, N,T = 11 Ni=1 (𝜎i2 Tt=1 μ2it−1 ) 2 Tt=1 (μ1it−1 Δ µit−γi).
∑ ∑
N2
7. t-statistics (Grouped parametric):
 Zp, N, T = 11 ∑N (∑T θ2 μ2 ) (μ Δ µit).
−1∕2 ∑N 1
i=1 t=1 it−1 t=1 it−1
N2

Where: γi = (𝜎i2 − θ2)/2 and θ∗ 2 N,T= 1/N Ni=1 θ∗ 2

∑
After estimating the panel cointegration test statistics, we determine the following
modification for mean and variance terms (YN,T − 𝜇)∕ ⇒ N(0,1) to ensure the asymptotic
distribution.

Table 1  Panel unit-root test Variables LLC test Breitung test

results
Level 1st Difference Level 1st Difference

lnCEit − 0.0702 − 6.7186*** 1.1292 − 3.9971***

lnUbit 94.3175 − 14.3795*** − 0.3115 − 9.0142***
lnRECpit − 1.2254 − 8.4721*** 2.4004 − 3.8130***
lnFDit − 0.3213 − 7.3713*** −1.0807 − 5.9445***
lnEGit − 0.3126 − 5.8208*** 1.2986 − 4.5182***
lnAgit − 0.6187 − 6.2327*** − 0.4345 − 3.9714***

*** signifies p value<0.01

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 A. Anwar et al.

Table 2  Cointegration tests

(A) Pedroni (2004) Panel Cointegration Test Results

Alter-hyp: common-AR coefficients. (within-dimensions)
Test (Panel) Statistic Prob-value Statistic Prob-value
v-Stat −0.568159 0.7150 −1.553286 0.9398
rho-Stat −0.140966 0.4439 2.321288 0.9899
PP-Stat −9.147436 0.0000 −6.045499 0.0000
ADF-Stat −9.594135 0.0000 −6.153396 0.0000
Alter-hyp: individual-AR coefficients. (between-dimensions)
Tests (Group) Statistic Prob-value
rho-Statistic 3.421990 0.9997
PP-Statistic −9.015551 0.0000
ADF-Statistic −7.145302 0.0000
(B) Kao Residual Cointegration Test
t-Statistic Prob-value
Augmented Dickey- −5.615665 0.0000
Fuller (ADF)
(C) Johansen-Fisher Panel Cointegration Tests
Tests Fisher Stat.* (from Prob-value Fisher Stat.* (from max Prob-value
Trace-test) Eigen-test)
None (At most) 757.4 0.0000 405.0 0.0000
1 393.0 0.0000 218.9 0.0000
2 222.6 0.0000 117.3 0.0000
3 139.1 0.0000 82.54 0.0000
4 91.48 0.0000 79.88 0.0000
5 43.92 0.0485 43.92 0.0485

Table 3  Estimation of long-run coefficients

Variables FMOLS DOLS FE-OLS
Coeff. t-stats. Prob. Coeff. t-stats. Prob. Coeff. t-stats. Prob.

LNFDit 0.244 6.277 0.0000 0.293 7.915 0.0000 0.293 4.152 0.0000
LNUbit 0.968 5.086 0.0000 0.701 5.200 0.0000 0.701 2.503 0.0128
LNEGit 0.456 4.520 0.0000 0.456 5.038 0.0000 0.456 2.315 0.0212
LNRECpit −0.362 −4.468 0.0000 −0.370 −4.761 0.0000 −0.370 −3.251 0.0013
LNAgit 0.135 1.231 0.2190 0.143 1.347 0.1787 0.143 0.950 0.3424

Here, YN,T shows the consistent practice of test statistics (i.e., N and T). 𝜇andV represent
Brownian motion movement functions (BMMF). The null (­H0) hypothesis: No cointegra-
­ 0: ρi = 1,∀ i = 1 to N.
tion for all the test statistics is H
Alternative ­(H1) hypothesis: The existence of cointegration between and within-dimen-
sions for the panel is H ­ 1: ρi < 1, i = 1 to N.
Likewise, for within-dimensions H ­ 1: ρi = ρ < 1, i = 1 to N.

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The nexus between urbanization, renewable energy consumption,…

Under the alternative hypothesis, ρi = ρ, assume a typical value and, all the value of
­ 0 under the
panel test statistics departs ∞. Therefore, the leftward tail is needed to reject H
normal curve.

3.3.3 Panel cointegration estimates

We apply a cointegration test to confirm the long-term association among the factors. As
generalized method of movement (GMM), fixed-effect (FE) and random-effect (RE) may
estimate misleading and inconsistent confidence when applied in panel data. Therefore, we
use the FMOLS suggested by Pedroni (2001) and DOLS offered by Kao (1999). FMOLS
addresses the problem of serial correlation and endogeneity in the ordinary least square
estimator. Further, Pedroni (2001) recommended a parametric dynamic OLS (DOLS) esti-
mator that eradicated the serial correlation and endogeneity problems. The present study
uses both approaches as these techniques might deliver a more precise indication of the
likely elasticity of urbanization and financial development as an exogenous variable.
Hence, panel FMOLS estimator� for� the slope-coefficient (β) is represented as:
∑N �∑T � �2 −1 ∑T � �� ∗
yit − y Z − T 𝜂 iWhere:
⌢
̂
𝛽=N −1 yit − y
i=1 t=1 t=1 it
( ) L̂
Zit∗ = zit − Z − 21i Δyit
L̂ 22i

( ) L̂
Zit∗ = zit − Z − 21i Δyit
L̂ 22i

̂ (
̂ 0 − L21i Γ̂ 22i + Ω
)
⌢
𝜂 ≡ Γ̂ 21i + Ω ̂0
21i 21i
L̂ 22i
( )
Li = Lower triangle decomposition of Ω
̂ ̂i
The related t-statistic gives:
t𝛽̂∗ = N −1∕2 Ni=1 t𝛽̂∗ ,i . And
∑

[( T
)] 1∕2
( ) ∑ )2
= 𝛽̂∗ − 𝛽0 ̂ −1
(
t𝛽̂∗ ,i i
Ω 11i
yit − y .
t=1

3.3.4 Decomposition analysis

Most of the causality tests do not provide relative strength causal associations (Shahbaz,
2012). On the other hands, the forecast variance decomposition method (FEVDM) and
impulse response function (IRF) give an innovative accounting approach (IAA) for exam-
ining causal connections among the indicators. This method was favored over the causality
tests as it provides the course and scale of causal connotations between model parameters
at various temporal frames (Menyah & Wolde-Rufael, 2010; Tiwari and Shahbaz, 2014).
Moreover, this test has ability to calculate both endogenous and exogenous changes.

13
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 A. Anwar et al.

4 Results and discussion

As the beginning point of the analysis, two diagnostic tests are conducted. First, the pos-
sibility of multicollinearity in the data is checked. This is necessary to understand whether
the long-run coefficients will be spurious, or not. The results of multicollinearity check
reported in "Appendix 1" show that the variables are free from multicollinearity. Second,
once it is affirmed that the data are free from multicollinearity issues, the methodological
selection needs to be confirmed. In this quest, possibility of the cross-sectional depend-
ence in the model parameters is checked. This checking is necessary to decide on whether
the methodological approach should be first or second generation in nature. The cross-sec-
tional dependence test results reported in "Appendix" 2 show that the variables are not
cross-sectionally dependent. Hence, in the empirical pursuit, the first-generation methods
can be applied.
To start with, Levin et al. (2002) panel unit-root test is applied. The findings reported
in Table 1 show that the variables are first order integrated. For assessing robustness of the
LLC test outcomes, the Breitung (2002) unit-root test is employed. This test confirms the
stationarity properties of the variables. Once it is affirmed that the variables are first order
integrated, i.e., they are stationary after the first differentiation, testing for the cointegration
among the variables is sanctioned.

Table 4  Variance decomposition analysis

Period S.E lnCEit ln ­FDit lnRECpit lnUbit lnEGit lnAgit

1 0.080359 100.0000 0.000000 0.000000 0.000000 0.000000 0.000000

2 0.110633 97.33931 0.591761 0.773570 0.127702 0.487833 0.679829
3 0.141824 96.69233 1.217063 0.514607 0.273509 0.488016 0.814473
4 0.165661 96.18620 1.409783 0.464024 0.463049 0.539065 0.937880
5 0.187760 95.78444 1.617082 0.386094 0.682002 0.522402 1.007981
6 0.207128 95.46892 1.678119 0.342611 0.926034 0.526545 1.057772
7 0.225151 95.19437 1.714648 0.302486 1.188674 0.518599 1.081227
8 0.241766 94.94656 1.705544 0.272945 1.467521 0.516009 1.091426
9 0.257445 94.71097 1.681681 0.247459 1.758500 0.511239 1.090157
10 0.272254 94.48125 1.642421 0.226560 2.059518 0.508041 1.082208
11 0.286388 94.25322 1.596830 0.208455 2.367796 0.504480 1.069222
12 0.299915 94.02467 1.546355 0.192880 2.681500 0.501428 1.053168
13 0.312933 93.79473 1.494081 0.179190 2.998636 0.498360 1.035005
14 0.325495 93.56305 1.441041 0.167123 3.317688 0.495486 1.015611
15 0.337657 93.32985 1.388417 0.156378 3.637195 0.492656 0.995501
16 0.349459 93.09549 1.336760 0.146769 3.955970 0.489920 0.975093
17 0.360937 92.86049 1.286545 0.138129 4.272942 0.487234 0.954659
18 0.372118 92.62542 1.238019 0.130329 4.587221 0.484609 0.934404
19 0.383028 92.39085 1.191358 0.123261 4.898035 0.482031 0.914468
20 0.393689 92.15732 1.146644 0.116838 5.204742 0.479503 0.894951
21 0.404119 91.92537 1.103910 0.110982 5.506802 0.477020 0.875920
22 0.414334 91.69544 1.063153 0.105632 5.803772 0.474584 0.857421
23 0.424347 91.46796 1.024339 0.100732 6.095293 0.472192 0.839482
24 0.434172 91.24331 0.987419 0.096234 6.381077 0.469844 0.822117

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The nexus between urbanization, renewable energy consumption,…

Accumulated Response of LNCE to LNCE Accumulated Response of LNCE to LNFD

3 3

2 2

1 1

0 0

-1 -1
2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24

Accumulated Response of LNCE to LNUb Accumulated Response of LNCE to LNEG

3 3

2 2

1 1

0 0

-1 -1
2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24

Accumulated Response of LNCE to LNRECp Accumulated Response of LNCE to LNAg

3 3

2 2

1 1

0 0

-1 -1
2 4 6 8 10 12 14 16 18 20 22 24 2 4 6 8 10 12 14 16 18 20 22 24

Fig. 2  Impulse response of CE on independent variables

Unit-root test result permits the examination of the cointegrating association among
variables. Table 2 illustrates the result of panel cointegration tests. The empirical outcomes
confirm the long-run association among CE, agriculture, EG, financial development,
renewable energy consumption, and urbanization for these economies. The results of Kao
residual and Johansen-Fisher cointegration tests confirm the robustness of Pedroni (1999)
cointegration test outcomes.
Results of cointegration tests testify cointegration among the variables, and this
set of outcomes sanctions the estimation of long-run coefficients. FMOLS methodol-
ogy suggested by Pedroni (2001) is utilized to find the unbiased and consistent long-run
coefficients.
Following the confirmation of the cointegration test results, the long-run coefficients
are estimated, and the results are reported in Table 3. For the purpose of analyzing the
long-run impact of the economic growth and its drivers on ­CO2 emissions, the results of
FMOLS will be discussed. This study outcomes indicate certain insights regarding the
developmental trajectory of these nations. To start with, the prevailing economic growth
pattern in these nations is environmentally unsustainable, and it is evident from the impact
of economic growth on carbon emissions. The coefficient of economic growth is posi-
tive and significant. This particular segment of the outcomes indicates that the persisting
economic growth pattern is responsible for the rise in carbon dioxide emission in these

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 A. Anwar et al.

nations. This piece of the empirical evidence resonates with the results of Salahuddin
et al. (2015), Sharif et al. (2019), Sinha et al. (2019a), and Zafar et al. (2021). Now, it
can be assumed that economic growth cannot automatically exert negative environmental
externality. Therefore, in order to understand the dynamics of this externality, the impacts
of the economic growth drivers on carbon dioxide emissions need to be analyzed. These
nations are recognized by their high growth prospect, and economic expansion requires
financial mobilization. The financialization toward the expansion of production processes
adds to the economic growth. As majority of this production processes are labor-intensive
in nature, so it can be expected that these processes will be less energy efficient. Hence,
by means of the expansion of production processes, financialization might exert negative
environmental externality in these nations. This very argument can be validated against the
expansionary influence of financial development on carbon dioxide emissions. This piece
of the empirical evidence resonates with the results of Ali et al. (2015), Al-Mulali et al.
(2015), and Boutabba (2014). With the economic expansion, job opportunities start ris-
ing. As the industrial development in these nations is majorly concentrated in the urban
and semi-urban areas, so the job opportunities are also concentrated in these regions only.
Rise in the job opportunities in turn increases the expectation of a better livelihood, as the
overall level of income will also rise. This expectation will start attracting the people from
the rural areas toward the urban centers, and these nations will start experiencing a rise in
the urban population. Now, as the job opportunities will be divided by the level of skill set,
the urban population will be eventually segregated in to skilled and unskilled labors. This
segregation might consequently increase the economic and social divides, and as a result,
the urban centers will experience the formation of slum areas and shadow cities. The peo-
ple residing in these areas lack the access to clean cooking fuels, and this unsustainable
energy usage pattern in turn increases the level of carbon dioxide emissions. This argument
can be validated by the expansionary impact of urbanization on carbon dioxide emissions.
This part of the empirical outcomes is comparable with the works of Pata (2018), Liddle
(2014), Shahbaz et al. (2014), and Alam et al. (2007). Now, with the rise in the overall
level of income, the demand of durables and consumables will rise. While the expansion of
production activities might be commensurate to the demand of durables, expansion of agri-
cultural activities will be required to fulfill the demand of consumables. In order to expand
the agricultural activities, more arable lands will be required. For this purpose, deforesta-
tion will take place through the channel of deforestation, expansion of agricultural activi-
ties will exert and environmental pressure. Validation of this argument is reflected in the
expansionary impact of agricultural productivity on carbon dioxide emissions. Although
insignificant, this impact can be a serious concern for the policymakers.
Study outcomes reveal that the course of economic growth in these nations is environ-
mentally unsustainable, and a major reason behind this is their reliance on the nonrenew-
able energy. This particular issue can be compared with the seminal work on the “Limits
to Growth,” initiated by the economists of Club of Rome (Meadows et al., 1972). Tak-
ing a cue from this discussion, it can be assumed that the basis of developmental course
might be harmed by prolonged reliance on nonrenewable energy. Hence, the policymakers
need to embark on initiating energy transition. Development and deployment of renewable
energy solutions are a major component of this initiative. Gradually rising dependence on
the renewable energy solutions can not only support these nations to diminish the level of
emissions, but also can support in solving the issue of energy security. A substantiation
of this argument can be reflected in the contractionary impact of renewable energy con-
sumption on carbon dioxide emissions. This piece of the empirical evidence resonates with

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The nexus between urbanization, renewable energy consumption,…

the results of Sinha et al. (2017), Sinha & Shahbaz (2018), Sharif et al. (2020), Dogan &
Ozturk (2017), Emir and Bekun (2019), Alola et al. (2019), Aziz et al. (2020), and Zafar
et al. (2020). The gradual rise in the renewable energy consumption in these nations is an
indication that the prevailing pro-growth policy myopia might go for a realignment in the
pursuit of sustainable development.
As a check of the robustness of the study outcomes, the empirical model has been tested
using DOLS and fixed effect OLS. The empirical outcomes reported in Table 3 indicate
that the impacts of the model parameters are nearly consistent for both the methods, along
with their significance levels. This gives an indication that the long-run coefficients esti-
mated by FMOLS method are robust.
The results of variance decomposition analysis with 24-year forecasting horizons
are described in Table 4. At five years, all variables, including Ub, FD, EG, and RECp
except agriculture, are responsible for almost 4% variance in ­CO2 emissions, whereas
almost 96% variance of ­CO2 emissions is accounted for its innovations. In the long run,
almost 91% variance in C ­ O2 emissions is due to its innovation. Almost 9% due to all
other variables, such as 0.98% due to financial development, 6.38% due to urbanization,
0.47% due to EG. The findings again show that the Ub is a leading cause of ­CO2 emis-
sion. On the other hands, EG and FD also directly and significantly influence C ­ O2 emis-
sions, but the effect is weak.
Moreover, Fig. 2 demonstrates the impulse response functions. As the standard
deviation of C ­ O2 emissions indicates an affirmative upsurge in future C ­ O2 emission.
The accumulated ­CO2 future response to FD, Ub, and EG is significant and positive,
whereas the ­CO2 future response to RECp is negative and significant. On the contrary,
the future response of ­CO2 to agriculture is statistically insignificant. Therefore, these
findings support the previous econometric estimations.

5 Conclusion and policy implications

5.1 Summary of results

The primary aim of this research study is to explore the impacts of urbanization, renewable
energy consumption, financial development, economic growth, and agricultural productiv-
­ O2 emissions in selected 15 Asian economies for the period 1990–2014. Based
ity on C
on the long-run coefficient estimation results, it can be concluded that urbanization, finan-
cial development, and economic growth are responsible for environmental degradation in
the long-run. On the contrary, renewable energy consumption is reducing environmental
degradation. Moreover, agriculture has a positive but statistically insignificant influence on
­CO2 emissions.

5.2 Policy framework

Prolonged reliance on nonrenewable might deter the overnight replacement of these

solutions, as it might create hindrance in the economic growth pattern. Therefore, these
policy instruments need to be calibrated in a way so that the problem of environmental
degradation can be handled, and these economies move forward toward realizing the
Sustainable Development Goals (Cheng et al., 2021; Sinha et al., 2021). As the urban
centers of these economies encountering rise in the population, rise in the energy

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 A. Anwar et al.

demand from the centers is inevitable. In order to cater to the surplus energy demand
arising from the households, the policymakers might take a phase-wise implementation
schedule. In the first schedule, the policymakers might consider subsidizing the renew-
able energy solutions for the households. As this move will have certain negative finan-
cial implications, a complimentary move needs to be taken by considering the industrial
players. Along with the households, the industrial players will also be able to avail the
renewable energy solutions for a predefined rate prescribed by policymakers, while the
price charged from the industrial players will be higher compared to the one provided to
the households. Now, the financial institutions might be given instructions to disburse
credits to firms for availing these solutions against discriminatory interest rates, depend-
ing on the carbon footprint of those players. Carbon footprint of the industrial players
can be assessed, and based on the level of carbon footprint, the rate of interest will vary,
i.e., higher carbon footprint will attract higher rate of interest. In that way, the industrial
players will gradually be discouraged to consume the fossil fuel solutions, as the policy
mandates will be focused at promoting the cleaner energy solutions. Gradual rise in the
renewable energy demand will be having scale effect on the renewable energy genera-
tion, which in turn will start reducing the price of the solutions (Sinha et al., 2020a, b).
This policy will help these nations to achieve not only cleaner energy solutions, but also
a secured energy future. This might support them to move forward on the way to realize
the objective of SDG 7.
While securing the energy future the policymakers also need to make the agricultural
activities mode sustainable by reducing the level of deforestation. If certain areas of for-
est need to be removed for the agricultural activities, policymakers need to ensure that
equivalent afforestation program is also taken up, so that the forest habitat is not displaced.
The farmers the advantage of affordable renewable energy solutions, so that be agricul-
tural activities start internalizing the negative environmental externalities. A similar kind
of activity might be carried out in the urban development front, and solution can be in
terms of implementing sustainable housing policies. One of the major aspects of these pol-
icies can be in terms of reducing the scope of space heating, which is a major contributor
of carbon emissions in the urban areas. Moreover, the policymakers might also consider
the scope of vertical gardening designs, which can internalize the carbon emissions with-
out having the space constraint. Lastly, providing easy and affordable loans to the urban
citizens for availing the renewable energy solutions might have sustained impact on the
environmental front, as the potential demand of energy arising out of these areas will be
the demand of green energy. These policy solutions as a whole will be able to help these
nations in progressing toward achieving the objectives of SDG 13.

5.3 Policy caveats and assumptions

In order to sustain this policy framework, the policymakers will be required to carry out
certain measures. First, the public property rights to be defined more rigorously, with the
purpose of stopping the unwarranted exhaustion of natural resources, i.e., forest resources.
Second, import substitution on the crude oil should be imposed, to facilitate the reduc-
tion of overall consumption of fossil fuel to the minimum. Third, the bureaucratic structure
needs to restrict rent-seeking exercises, so that the diffusion of renewable energy solutions
across the nations can be smooth. These measures can be considered as the policy caveats.

13
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The nexus between urbanization, renewable energy consumption,…

Appendix 1

See Table 5.

Table 5  Multicollinearity Variables VIF Tolerance R-square

statistics
lnCEit 1.61 0.62112 0.37888
lnEGit 1.34 0.74627 0.25373
lnRECpit 1.29 0.77519 0.22481
lnFDit 1.35 0.74074 0.25926
lnAgit 1.17 0.85470 0.14530
lnUbit 1.97 0.50761 0.49239

Appendix 2

See Table 6

Table 6  Cross-sectional Variables Statistics p value

dependence results
lnCEit 0.183 0.497
lnEGit 1.408 0.218
lnRECpit 1.325 0.647
lnFDit 0.612 0.359
lnAgit 0.167 0.181
lnUbit 0.135 0.239

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Authors and Affiliations

Ahsan Anwar1,2 · Avik Sinha3 · Arshian Sharif4,5 · Muhammad Siddique1 ·

Shoaib Irshad6 · Waseem Anwar7 · Summaira Malik8
Avik Sinha
[email protected]
Arshian Sharif
[email protected]
Muhammad Siddique
[email protected]
Shoaib Irshad
[email protected]
Waseem Anwar
[email protected]
Summaira Malik
[email protected]
1
Department of Economics, National College of Business Administration and Economics, Lahore,
Pakistan
2
Planning Department, Lahore Transport Company, Government of Punjab, Lahore, Pakistan
3
Centre for Excellence in Sustainable Development, Goa Institute of Management, Goa, India
4
Othman Yeop Abdullah Graduate School of Business, University Utara Malaysia, Sintok, Kedah,
Malaysia
5
Department of Business Administration, Ilma University, Karachi, Sindh, Pakistan
6
Department of Business Administration, Izmir University of Economics, Izmir, Turkey
7
Department of Management Sciences, COMSATS University Islamabad, Lahore Campus, Lahore,
Pakistan
8
Department of Economics, COMSATS University Islamabad, Lahore Campus, Lahore, Pakistan

13
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