The Role of Renewable Energy and Total Factor Productivity in Reducing CO2 Emissions in Azerbaijan. Fresh Insights from a New Theoretical Framework Coupled with Autometrics

Since environmental pollution such as CO2 emissions is one of the most critical issues facing humanity, there are countless studies that address it. Traditional theoretical frameworks for CO2 emissions, such as the environmental Kuznets curve, are quite limited in informing policy making. Therefore, empirical studies have extended this framework in recent decades by including other socioeconomic, energy-related, and other variables. However, with few exceptions, almost all these studies have made their expansion in an ad-hoc manner and out of self-interest, without providing a theoretical basis. This theoretical groundlessness undermines the reliability of such studies and their potential usefulness for policy making. With this in mind, we studied pollution in Azerbaijan using a new theoretically grounded framework in which consumption-based CO2 emissions are a function of renewable energy consumption (REC) and total factor productivity (TFP), as well as income, exports, and imports. REC and TFP have not only emission-reducing properties but also growth-enhancing benefits and are therefore very useful to be considered in policymaking. We conducted an econometric analysis with robustness checks and using the state-of-the-art econometric methodology called Autometrics - a deep machine learning modeling algorithm. CO2 was found to be negatively affected by TFP, REC, and exports, while income and imports had a positive impact. Our key policy insights are that Azerbaijani policymakers may wish to consider implementing policies that promote technological improvements, efficiency gains, and the transition to renewable energy