Growth, coal and carbon emissions: economic overheating and climate change

Summary

Focus

Climate change is perhaps the greatest challenge of our time. It poses unprecedented risks to our economies. By the end of the century, global temperatures are likely to rise by 3 degrees Celsius from pre-industrial levels, and could rise even more. To avoid a climate catastrophe we need to reduce the emission of carbon dioxide that drives climate change. Therefore, our economies need to change. To devise the right policies, policymakers need to map macroeconomic variables into carbon emissions.

Contribution

We map macroeconomic outcomes into carbon emissions. We use comprehensive data from a panel of 121 countries over the 1971–2016 period. We link per capita carbon emissions to key macroeconomic variables, such as GDP growth, the level of urbanisation and the energy mix (coal, oil and renewable energy sources). We study both advanced and emerging market economies, and also different time periods.

Findings

We find that carbon emissions rise with economic development, manufacturing activity, urbanisation and, increasingly, economic growth. We also find that in electricity generation, the use of coal, and to a lesser degree of oil, is associated with high emissions. In contrast, renewable energy use is already associated with lower aggregate emissions in advanced economies. We also uncover that economic overheating is particularly harmful when coal use is higher. Our results suggest that mitigating economic cycles can also reduce carbon emissions.

Abstract

We use a comprehensive database of 121 countries over the 1971-2016 period to study how macroeconomic factors drive carbon (carbon-dioxide) emissions. For this purpose, dynamic panel regressions are estimated. Carbon emissions rise with economic development, manufacturing activity, urbanization and increasingly with economic growth. In electricity generation, the use of coal, and to a lesser degree of oil, is associated with higher carbon emissions, while renewable energy use is already associated with lower national emissions in advanced economies. We also uncover a non-linearity: economic overheating is particularly harmful when coal use is more intensive. The results suggest that mitigating economic cycles might also reduce carbon emissions.

JEL classification: O40, O44, Q00, Q40, Q50.
Keywords: carbon dioxide, climate change, coal, emissions, energy, environment, growth, pollution, urbanisation.