Decoupling of CO2 emissions and GDP: A time-varying cointegration approach

by Jeyhun I. Mikayilov, Fakhri J. Hasanov and Marzio Galeotti

The relationship between CO2 emissions, the main gas responsible for global warming, and economic growth is among the most studied themes of environmental economics. Reducing overall emissions while keeping a high pace of economic development is at the heart of the notion of sustainable development.
Economists refer to the case when emissions increase (resp. decrease) less rapidly than the pace of economic growth as relative (resp. absolute) decoupling. This requires the empirical analysis of the emissions-GDP relationship. The study of this relationship has special importance for developed countries, since they have been historically the main contributors of the global warming.
Unlike the bulk of the literature, in this paper we allow the income elasticity of emissions – a critical metrics for the study of decoupling – to vary over time. The reason is that the elasticity might change through the time due to the factors affecting the drivers of the CO2 emissions. We use a time-varying coefficients cointegration approach to investigate the CO2 emissions-GDP relationship for 12 Western European countries over a long period ranging from 1861 to 2015.
The main finding is that the income elasticities of CO2 emissions are found to be positive in all investigated countries. In addition, we find evidence in favor of relative decoupling – emissions increasing more slowly than GDP – in 8 out of the 12 European countries. The remaining 4 cases the income elasticity of CO2 emissions are in excess of unity. In nearly half of cases the analysis confirms a statistically significant time-varying pattern for the income elasticities.