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Carbon Emissions and Business Cycles

Hashmat Khan (), Christopher Knittel (), Konstantinos Metaxoglou () and Maya M. Papineau ()
Additional contact information
Konstantinos Metaxoglou: Department of Economics, Carleton University, http://carleton.ca/economics/people/metaxoglou-konstantinos/
Maya M. Papineau: Department of Economics, Carleton University, http://carleton.ca/economics/people/papineau-maya-m/

No 15-07, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: Carbon emissions and real GDP are strongly correlated over the U.S. business cycle. This relationship suggests that macroeconomic shocks inducing cyclical fluctuations in output should also account for the cyclical behavior of emissions and motivates our analysis. We begin by expanding the set of technology shocks in a popular emissions- augmented dynamic stochastic general equilibrium model from the literature, and show that the model generates positive emissions-GDP comovements to each shock through distinct channels. We then estimate the emissions’ response to empirically identified technology shocks using structural vector autoregressions (SVARs). Using the SVARs, we also rank the shocks in terms of explaining the emissions’ forecast error variation. While emissions tend to rise gradually after most shocks, consistent with their theoret- ical counterparts, the impulse responses are not statistically significant. Unanticipated technology shocks account for less than 10 percent of the variation in emissions. By contrast, anticipated investment technology shocks account for 25 percent of the varia- tion. Government spending and monetary policy shocks account for less than 1 percent. Importantly, close to two thirds of the variation in emissions appears to be due to a structural shock not yet identified in the literature.

Keywords: business cycles; carbon emissions; dynamic stochastic general equilibrium; structural shocks; environmental policy (search for similar items in EconPapers)
JEL-codes: E32 Q58 Q54 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env and nep-mac
Date: 2015-08-31, Revised 2019-01-10
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Published: Carleton Economic Papers

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Working Paper: Carbon Emissions and Business Cycles (2016) Downloads
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