CO2 Emissions and the Macroeconomy: An Econometric Approach

Abstract

This thesis explores the effect of four macroeconomic variables on CO2emissions for the G7 countries plus China, between 1970 and 2017. The independent variables applied are GDP per capita (GDP), crude oil prices (OIL), annualized inflation (CPI), and nominal interest rate (INT).The overall purpose is to investigate how the effects of these variables on CO2emissions differ between countries and time periods. A structural break test found that each dataset breaks between 1992 and 1998. After finding cointegration a vector error correction model (VECM) is applied to infer/deduce/surmise linear relations between the variables. The main findings indicate that results are coherent among countries but differ between time series. For all variables, significant relationships were found. For the pre-break period, an increase to GDP and OIL result in higher CO2 emissions (ceteris paribus), while an inverse relationship is found for CPI and INT. In the post-break datasets, the effect of each independent variable shifts to its opposite, except for GDP. Overall, the relevance of exploring CO2 emissions from a macroeconomic perspective is emphasized since each of the analyzed independent variables possess a measurable effect.