Causal relationship between fossil fuel consumption and economic growth in Japan: a multivariate approach

Fossil fuels (oil, coal, gas) are low-entropy natural resources which seem to be indispensable for our economic prosperity. This paper investigates the relationship between fossil fuel consumption and economic growth in Japan, using a multivariate model of fossil fuels, non-fossil energy, labor and GDP. Using the Johansen cointegration technique, the empirical results indicate that there is a long-run relationship among the variables. Then using vector error correction model, the study reveals unidirectional causality running from fossil fuels to GDP. It implies that decline in fossil fuel consumption may hamper economic growth. On the other hand, non-fossil energy use does not appear to have positive effects on economic growth.