Determinants of CO2 Emissions in Azerbaijan’s Manufacturing and Construction Sectors: The Roles of Energy Intensity, Output, and Investment (ARDL–ECM with Structural Breaks)

This study investigates the determinants of CO2 emissions in Azerbaijan’s manufacturing and construction sector (MC), focusing on the roles of energy intensity, output scale, and investment. Using annual time-series data for the period 2007–2023, we apply the ARDL-ECM model, which is suitable for mixed integration orders and small samples. Structural breaks related to the national currency devaluation in 2015 and the COVID-19 pandemic during 2020–2022 are controlled for through dummy variables. The ARDL results confirm the existence of a stable long-run relationship between MC emissions, energy intensity, output volume, and investment. In the baseline specification, both energy intensity and output volume have a positive and statistically significant effect on CO2 emissions. The findings also confirm the dominance of scale and technique channels. Specifically, increased economic activity and higher energy use per unit of output lead to higher CO₂ emissions in the MC sector in both the short and long run. In contrast, investment is negatively associated with emissions. This suggests that capital deepening in this sectoral aggregate is more aligned with modernization and efficiency-enhancing upgrades rather than purely capacity-expanding effects. The error correction term (ECM) is negative and highly significant, indicating a rapid adjustment toward long-run equilibrium following shocks.