Indonesia’s Greenhouse Gas Puzzle: VECM Unravels Impact

Abstract

This study investigates the dynamic relationship between greenhouse gas (GHG) emissions, agricultural activity, forest area, and other industrial sectors in Indonesia using the Vector Error Correction Model (VECM) approach. The analysis employs annual data from 1990 to 2023 to capture both short-run adjustments and long-run equilibrium among the variables. The results indicate that in the short run, agricultural and industrial activities significantly increase GHG emissions, while changes in forest area have a negative but statistically insignificant effect. The negative and significant error correction term confirms the existence of long-run equilibrium, with approximately 30% of deviations from equilibrium corrected each period, indicating moderate adjustment speed. In the long run, agricultural and industrial sectors remain key contributors to emission growth, whereas forest expansion mitigates emissions over time. Diagnostic and stability tests confirm that the model is statistically sound, stable, and free from serial correlation and heteroskedasticity. The impulse response analysis further reveals that shocks from agriculture and industry lead to persistent increases in emissions, while forest shocks exert stabilizing effects. The findings underscore the need for integrated and sustainable policy interventions across sectors. Policymakers should promote climate-smart agricultural practices, enhance industrial energy efficiency, and strengthen forest conservation efforts to achieve balanced economic and environmental outcomes. Moreover, coordinated cross-sectoral policies and investments in green technology are crucial to ensure Indonesia’s transition toward a low-carbon and sustainable growth path.