Evidence on CO2 emissions and business cycles
Abstract of Working Paper 90
CO2 emissions and GDP are positively correlated over the business cycle. Most climate change researchers would agree with the preceding intuitive statement despite the absence of a study that formally analyses the relationship between emissions and GDP at business cycle frequencies.
The current paper attempts to address this gap in the literature by providing a simple, rigorous and consistent analysis of the relationship in a comprehensive cross country panel.
To this end, I decompose the aggregate emissions and GDP series into their growth and cyclical components using the HP filter and focus on the cyclical components.
Four robust facts emerge from this analysis:
Emissions are procyclical and cyclically more volatile than GDP in a typical country;
Cyclical volatility of emissions is negatively correlated with GDP per capita across countries;
Procyclicality of emissions is positively correlated with GDP per capita across countries; and
The composition of GDP is crucial for the business cycle properties of emissions but the relationship is complex.
We undertake and report an extensive set of robustness checks which corroborate these findings.
Finally, we propose some preliminary thoughts on the mechanisms that may be generating the data with these properties.