Evidence on CO2 emissions and business cycles

Science in 2008 to advance public and private action on climate change through innovative, rigorous research. The Centre is funded by the UK Economic and Social Research Council and has five inter-linked research programmes: 1. Developing climate science and economics 2. Climate change governance for a new global deal 3. Adaptation to climate change and human development 4. Governments, markets and climate change mitigation 5. The Munich Re Programme-Evaluating the economics of climate risks and opportunities in the insurance sector established by the London School of Economics and Political Science in 2008 to bring together international expertise on economics, finance, geography, the environment, international development and political economy to create a world-leading centre for policy-relevant research and training in climate change and the environment. This working paper is intended to stimulate discussion within the research community and among users of research, and its content may have been submitted for publication in academic journals. It has been reviewed by at least one internal referee before publication. The views expressed in this paper represent those of the author(s) and do not necessarily represent those of the host institutions or funders. Abstract CO 2 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 analyzes 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: i) Emissions are procyclical and cyclically more volatile than GDP in a typical country; ii) Cyclical volatility of emissions is negatively correlated with GDP per capita across countries; iii) Procyclicality of emissions is positively correlated with GDP per capita across countries; and iv) The composition of GDP is crucial for the business cycle properties of emissions but the relationship is complex. I undertake and report an extensive set of robustness checks which corroborate these findings. Finally, I propose some preliminary thoughts on the mechanisms that may be generating the data with these properties. All remaining errors are mine.