Abstract
This study explores the impact of economic development on energy consumption and climate change using Malaysian data from 1977 to 2018. We employ five alternative indices—gross domestic product, financial development, industry value‐added, agricultural value‐added, and manufacturing value‐added—to assess economic development. Three alternative proxies (electricity, oil, and fossil fuel consumption) are employed to determine the energy consumption level. The climate change variable has been approximated through the level of CO2 emission and the average temperature for the country. Data has been analysed through three‐stage least square, vector autoregression, and innovative accounting approach. Results indicate that a higher level of economic development leads to higher energy consumption, which contributes to climate change. Moreover, the increase in urbanization and transportation also increases the level of carbon emissions. Forestation, on the other hand, plays a vital role in the improvement of environmental quality.