Environmental Degradation in Indonesia and Malaysia: The Effect of Energy Consumption, Economic Growth, Population, and Foreign Direct Investment (FDI)

The main objective of this study is to examine how energy consumption, economic growth, population, and foreign direct investment (FDI) affects CO₂ emissions in Indonesia and Malaysia. This study uses the longest and most updated annual data during the period 1960-2018. To get a deeper analysis, this study employs disaggregate of CO₂ emissions and energy consumption data namely, oil, coal and natural gas. The ordinary least square which preceded by unit root test and classical assumption test are employed. The results show that all type of energy consumption affect positively to CO₂ emission. Economic growth is identified as the variable with greatest influences on CO₂ emissions in oil and natural gas model, while CO₂ emissions from coal consumption are mainly affected by populations. The study concludes that economic growth of both countries relies heavily on fossil fuel. CO₂ emission sourced from coal mostly affected by population due to the high demand of electricity from household fulfilled by power generation which use coal as the fuel. The EKC hypothesis is confirmed in the model of gas, indicate that natural gas is the most appropriate source of energy to be used at the certain level. Using natural gas is effectively decrease the CO₂ emission while in the same time increase the economic growth. Natural gas is also found as the most environmentally friendly fossil fuel due as it produces less CO₂ emission compared to oil and coal. The findings have important implications for policy makers in determining policy and business decisions especially to enhance environmentally friendly energy uses for the benefit of the economy.