ECONOMIC GROWTH, URBANISATION, TRADE, AND ENVIRONMENTAL QUALITY IN THE EUROPEAN UNION: ARDL AND GRANGER CAUSALITY ANALYSIS

Abstract

The relationship between economic development, urbanisation, trade openness, and environmental quality has emerged as a critical focus of empirical and policy-oriented research, particularly in the context of sustainable development. This study investigates the long-run and dynamic interactions between economic development, urbanisation, trade openness, institutional quality, energy use, and environmental quality in 26 European Union (EU) countries over the period 1970–2022. The analysis is grounded in panel unit root and cointegration tests, Pooled Mean Group (PMG) Autoregressive Distributed Lag (ARDL) models, and Dumitrescu–Hurlin panel Granger causality tests. The findings confirm the Environmental Kuznets Curve (EKC) hypothesis, revealing a non-linear relationship between income and CO₂ emissions. Urbanisation and trade openness were found to significantly increase emissions, while institutional quality plays a mitigating role in environmental degradation. Energy consumption remains a primary driver of emissions, with strong evidence of causality from economic activity, urbanisation, and energy use to CO₂ emissions. The PMG model results are robust across alternative estimators, and cointegration analysis confirms the existence of stable long-run relationships among the variables. The results have important implications for EU policy, suggesting the need for integrated approaches that couple economic growth with decarbonisation strategies. Strengthening institutional quality can improve environmental governance. Investment in sustainable urban planning and energy transition will be key to curbing emissions while maintaining competitiveness. Future research should focus on disaggregating energy sources, modelling structural breaks, and employing spatial methods to capture regional spillovers within the EU.