Dynamic effects of consumption, investment, and trade openness on carbon emissions in indonesia using vector autoregressive approach for sustainable planning

Abstract Indonesia’s rapid economic expansion has intensified concerns about rising carbon dioxide (CO₂) emissions, yet there is limited evidence on how key economic activities simultaneously influence the country’s carbon trajectory. This study examines the dynamic interrelationships among consumption, investment, trade openness, and CO 2 emissions using annual data for 1990–2024 were obtained from the World Bank and Bank Indonesia. Using a Vector Autoregressive (VAR) framework, the analysis employs Granger causality tests, impulse response functions (IRFs), and forecast error variance decomposition (FEVD) to capture both short- and long-run causal mechanisms and adjustment patterns. The Granger causality results show that consumption ( p = 0.041) and trade openness ( p = 0.023) significantly drive CO 2 emissions, whereas investment does not directly Granger-cause emissions ( p = 0.642) but reacts strongly to changes in consumption and external trade conditions. FEVD results further indicate that trade openness explains approximately 20.56% of long-run CO 2 emissions variance, while consumption contributes 19.85% by the tenth forecast period. Medium-term forecasts suggest an upward trend in emissions after 2020. However, these projections should be interpreted with caution given the model’s reduced-form nature. These findings underscore the need for integrated mitigation strategies. Broad policy insights point to the importance of improving energy efficiency, strengthening environmental governance in trade activities, and encouraging investment that supports lower-carbon development. This study contributes to the environmental economics literature by providing the first Indonesia-specific VAR-based assessment that jointly evaluates the dynamic roles of consumption, investment, and trade openness in shaping CO 2 emissions.