HOW GEOPOLITICAL RISK SHAPES THE IMPACT OF ECONOMIC POLICY UNCERTAINTY ON CARBON INTENSITY IN SAUDI ARABIA: ASYMMETRICAL ANALYSIS

Abstract

Economic Policy Uncertainty (EPU) represents a significant impediment to the advancement of renewable energy transitions within national economies. Against this backdrop, the present study examines the asymmetric influence of EPU on Carbon Intensity (CI) in Saudi Arabia over the period 1970–2024, while additionally assessing the moderating role of Geopolitical Risk (GPR). To achieve this objective, the nonlinear Autoregressive Distributed Lag (NARDL) framework combined with bounds testing is employed. Furthermore, the analysis incorporates both Ng–Perron unit root procedures and structural break tests to ensure the robustness of the empirical findings. The results confirm the validity of the Environmental Kuznets Curve (EKC) hypothesis in the long run, although corresponding evidence for the short run remains inconclusive. Under the long-run symmetric specification, both EPU and GPR exert positive influences on CI, indicating that heightened uncertainty and geopolitical tensions contribute to environmental deterioration. Additionally, the interaction between EPU and GPR magnifies these adverse effects. The long-run asymmetric estimates reveal that positive shocks in GPR elevate CI, whereas negative shocks contribute to its reduction. Similarly, increases in EPU lead to higher CI levels; however, reductions in EPU do not generate a proportionate decline in CI. When the interaction effects are considered, rising EPU continues to intensify CI, while declining EPU becomes effective in lowering CI in the presence of changing GPR conditions. These findings suggest that escalating GPR reinforces the detrimental environmental consequences associated with increasing EPU, whereas declining GPR facilitates the mitigation of environmental pressures arising from reductions in EPU. The evidence highlights the pronounced sensitivity of the Saudi economy to both domestic policy-related uncertainty and broader regional geopolitical disturbances. Consequently, efforts aimed at simultaneously lowering EPU and GPR are likely to contribute to reductions in CI. On this basis, the study advocates the adoption of more predictable and consistent economic policy frameworks alongside initiatives designed to alleviate geopolitical tensions as part of Saudi Arabia’s broader environmental sustainability strategy.