How Do FDI and Population Affect Carbon Emissions in Indonesia: An ARDL Approach

Abstract

Indonesia is challenged to balance as income rises, population expands, and foreign direct investments grow, there is a tension between economic progress and reducing carbon emissions. This study examines both the immediate and extended connections between GDP per capita and carbon dioxide (CO₂) emissions, population, and foreign direct investments (FDI) in Indonesia using annual data spanning 1989 to 2023, resulting in 34 observations. The study uses the Autoregressive Distributed Lag (ARDL) approach in estimating the dynamic relationships between the variables. Augmented Dickey-Fuller with the bounds test confirming the establishment of long-run cointegration. The findings of the ARDL (1, 1, 0, 0) model revealed that GDP per capita and population exert substantial and beneficial effects on CO₂ emissions over both immediate and extended timeframes. On the other hand, foreign direct investment, after being transformed through inverse hyperbolic sine, has a negative and significant impact on CO₂ emissions both in the short- and long-run periods. An adjustment coefficient of -0.818 means that about 81.8 percent of the short-run imbalance is corrected in one period. Robustness analysis estimates retain the nature of the long-run coefficients.