Environmental sustainability is one of the three dimensions of sustainable development. Today, environmental protection is one of the biggest problems for all countries. Seventh Millennium Development Goal is “ensuring environmental sustainability” that imposes specific responsibilities on government, institutions, societies, policymakers and individuals (UN 2015). Since these responsibilities are global priorities, many researches attempted to find economical and energy-efficient methods to meet Sustainable Development Goals (Delanka-Pedige et al. 2020).
Greenhouse gases produced by man-made activities, such as burning fossil fuels, absorb heat and create global warming, leading to changes in the climate system which results to the increase in global average temperature. Undebatable, this is one of the most pressing issues confronting humanity today. Since a result, global climate change is one of the most pressing policy problems of the century for all governments, as it jeopardizes society's well-being, complicates economic progress, and alters the natural environment. The United Nations Sustainable Development Summit in 2015 September noted in “Transforming our world: the 2030 agenda for sustainable development”, according to the 13th Sustainable Development Goal, “The global character of climate change necessitates the broadest feasible international collaboration aimed at accelerating global greenhouse gas emissions reductions and addressing adaptation to climate change's harmful effects” (UN 2015). Carbon dioxide takes significant part among other environmental pollutants. Based on the World Bank (2007), it is caused by the burning of fossil fuels and the production of cement, which account for over 60% of greenhouse gas emissions, which as a consequent cause the climate change (World Bank 2007). Carbon dioxide is created by the combustion of solid, liquid, and gas fuels, as well as gas flaring. Furthermore, the Intergovernmental Panel on Climate Change (IPCC) (2014) states that CO2 emissions from fossil fuel combustion and industrial activities promoted approximately 78% of the rise in total greenhouse gases emission over the period of 1970-2010, with a similar percentage contribution during 2000-2010. In order to reach environmental sustainability around the world in terms of greenhouse gases, the Kyoto protocol was accepted in 1997 by many governments over the world, which puts commitment on developed countries to reduce emissions (Mikayilov et al. 2018).
The level of greenhouse gas emissions from developing economies has been sharply exceeding that of developed economies, which constituted approximately 50% of the world’s overall CO2 emissions in 2003. If the present level of energy consumption goes on, today’s CO2 trend is predicted to rise. It is the main reason that all policymakers should formulate effective policy actions in reducing CO2 emissions. However, due to the differences between developed and developing economies and even distinctions between different economies within the same group, those policy measures will generally not be indistinguishable and should be analyzed for individual countries specifically, resource-rich developing countries. In terms of environmental deterioration, the important portion among the developing countries belongs to resource-rich (particularlyoil-exporting economies). Because these economies have plentiful natural resources (such as oil, gas, and coal) at low/subsidized prices, a focus on economic growth may lead to the wasteful and unregulated exploitation of these resources, resulting in significant climate deterioration (Hasanaov et al. 2019). In this regard, the investigation of reducing CO2 emmissions for oil-rich countries gains particular importance.
The basic goal of sustainable development is to reduce total emissions while maintaining high levels of economic development (Mikayilov et al. 2018). There, the carbon pricing policies would be more effective in reducing CO2 emissions. The implementation of carbon prices policies can raise the cost of production and could negatively influence the competitiveness of energy intensive industries. In the literature, competitiveness has been widely discussed during the last decades. Krugman (1995) defined competitiveness as the equivalent of productivity. However, he states that competitiveness is a “wrong and dangerous definition” if it is implemented at the international level. Fagerberg (1988) stated international competitiveness as an ability to achieve central economic policy goals, particularly economic growth and higher employment, without running into balance-of-payments problems. Wignaraja (2003) defined competitiveness as the ability of an economy to produce what meet the test of international competition while increasing real GDP. In addition, Aiginger (2006) and Kao (2008) described competitiveness as the skill to create welfare, the relative ability of an economy to produce and preserve an atmosphere in which firms can compete so that the level of wealth can be developed. The authors also recommend that each comprehensive valuation of competitiveness should cover an outcome estimation and a process assessment, on one hand, and must be compared to other similar economies, conversely.
There are many researches examining the impact of carbon pricing on international competitiveness. The previous researchers use various proxies like, employment, productivity, output, innovation, inflation, exchange rate, investment for international competitiveness. Among these researchers, Saddler et al. (2006) in the case of Australia, Pearce and McKibbin (2007), Rivers (2010) in the case of Canada, Mafizur (2011) in the case of Australia, Grottera et al. (2015) in the case of G20 countries revealed a negative impact from carbon pricing to international competitiveness. In addition, some studies such as, Reinaud (2008), Bassi et al. (2009) for USA, Branger and Quirion (2014), Silva et al. (2016) for Brazil, Carbone and Rivers (2017), Dechezlepre and Sato (2017), Rentschler et al. (2017) for Saudi Arabia, Pradhana et al. (2017) for India reached the similar results. Also, In the case of U.K., Kneller and Manderson (2012) revealed a negative correlation whereas, Zhao (2011) demonstrates a statistically significant negative impact from carbon taxes to the international competitiveness of energy-intensive sectors. On the other hand, Dissou and Eyland (2011), Timilsina et al. (2013), Sbroiavacca et al. (2016), Santos et al. (2018) conclude the positive impact of carbon pricing on competitiveness. Additionally, Rivers and Schaufele (2014) reached that there is no persuasive link. Moreover, the insiginificant relationship were revealed by Zhang and Baranzini (2004), Bataille et al. (2009), Clarke and Waschik (2012), Beale et al. (2015), Aldy and Pizer (2015).
From the literature, the implementation of the Emission Trading System (ETS) and carbon taxation as carbon pricing measures (explicit) may not be as successful in transition economies and oil rich countries, due to the lack of socio-economic institutions, infrastructure, and regulatory frameworks. For this reason, the better way is to consider implicit carbon price policies. Empirical studies indicate that the implicit measures of carbon pricing (increasing the energy prices or removing fossil fuel energy incentives) are more suitable for developing economies and easier to apply as compared with explicit measures (ETS, carbon taxation and so on). Due to associated infrastructure, the latter requires market establishments and legislation (Aldy and Stavins 2012; Klenert et al. 2018; Hasanov et al. 2020).
In developing countries (particularly resource-rich), reforming energy prices as an implicit carbon price measures might be implemented. The profit margins in some sectors cannot be preserved at previous levels with the removal of fossil fuel incentives. In developing countries, macro-econometric studies devoted to carbon pricing policies-international competitiveness nexus are necessary to measure the role of energy price mechanisms precisely and reliably. Also, it is needed to formulate mitigation policies that diminish any loss in competitiveness from the removal of fossil fuel incentives. (Hasanov et al. 2020).
Azerbaijan is one of the most oil-rich countries yet gifted with abundant renewable energy resources, making it a special case for this study. In Azerbaijan, the total air pollutant emissions were 620 thousand tons in 2002. It was almost doubled and reached to 1122.0 thousand tons in 2019. The total air pollutant emissions increased by 80,9 %, with an average 4.06 % annual growth rate during 2002-2019 (SSCA 2021a). From the economic dimension of the development, Azerbaijan economy has been demonstrating a considerable economic growth since 2006. Over the period 1996-2019, Azerbaijani GDP increased by 29.9 times, from 2733 million manats in 1996 to 81681 million manats in 2019 (SSCA 2020). Economic growth in turn, as other wings of sustainability, might cause negative impacts on environment through different channels. a deteriorated environment and environmental resources have negative consequences for individuals, society, and nature. To maintain the balance of development factors, or to create sustainable development, resources must be used in an ecologically acceptable manner.
Considering the above-mentioned facts, it is necessary to evaluate the impact of carbon pricing policies on international competitiveness in Azerbaijani case employing time-series econometric methods. Therefore, the purpose of the current article is to investigate the impact of carbon price measure (implicit) on international competitiveness in the Republic of Azerbaijan by employing different cointegration methods such as ARDBT, CCR, DOLS, FMOLS. The main contribution of the study is that it is only one time series analysis investigating the impact of carbon pricing policy (implicit) on international competitiveness in the case of Azerbaijan which can be useful for Azerbaijani policymakers to conduct policy regulations for reducing the CO2 emissions. In addition, the study can encourage researchers to conduct the same study for the countries similar to Azerbaijan.