A new methodology for assessing the energy use-environmental degradation nexus

The international community is more than ever before worrying about the unremitting global warming and climate change and the responsibility of extensive energy use for that situation. This article contributes to the existing literature by examining whether energy consumption predicts CO₂ emissions during the past 50 years in the five most polluting nations in the world. To do this, we have been using the recently developed predictability test of Westerlund and Narayan (Journal of Banking and Finance, 36, 2632-2640, 2012, Journal of Financial Econometrics, 13, 342-375, 2015). We take thereby into account the problem of endogeneity and persistence in the explanatory variable. Likewise, this test has the advantage of treating the problem of heteroscedasticity. Using several predictive evaluation measures and assuming the historical average as a benchmark, we find that the basic model of the predictability test of Westerlund and Narayan (2012, 2015) surpasses the benchmark model. These findings reveal that primary energy consumption predicts CO₂ emissions in the world and all countries, for different forecast horizons. Further, the in-sample evidence of predictability has been supported by the out-of-sample analysis.