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Carbon Emissions and Business Cycles

30 Pages Posted: 1 Jun 2016 Last revised: 29 Jun 2016

Hashmat U Khan

Carleton University - Department of Economics

Christopher R. Knittel

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Konstantinos Metaxoglou

Carleton University

Maya Papineau

Carleton University

Date Written: May 2016

Abstract

U.S. carbon dioxide emissions are highly procyclical—they increase during expansions and fall during recessions. Given this empirical fact, we estimate the response of emissions to four prominent technology shocks from the business-cycle literature using structural vector autoregressive methodologies and data for 1973–2012. By studying the response of emissions to these shocks, we provide a novel approach to assess the shocks’ relevance as sources of aggregate output fluctuations. We find that emissions rise on impact only after an anticipated investment-specific technology shock; the response is statistically significant after the first quarter. The same shock explains most— roughly a third—of the total variation in emissions at a horizon of 5 years. Notably, emissions decrease on impact after an unanticipated neutral technology shock in a statistically significant way. This negative empirical response has the opposite sign from its theoretical counterpart in recent environmental DSGE (E-DSGE) models. Since the positive response of emissions drives the E-DSGE models’ recommendation for an optimal procyclical policy, our findings suggest that such a policy recommendation should be treated cautiously.

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Suggested Citation

Khan, Hashmat U and Knittel, Christopher R. and Metaxoglou, Konstantinos and Papineau, Maya, Carbon Emissions and Business Cycles (May 2016). NBER Working Paper No. w22294. Available at SSRN: https://ssrn.com/abstract=2786472

Hashmat Khan (Contact Author)

Carleton University - Department of Economics ( email )

1125 Colonel By Drive
Ottawa, Ontario K1S 5B6
Canada

HOME PAGE: http://www.carleton.ca/~hashkhan/

Christopher R. Knittel

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Konstantinos Metaxoglou

Carleton University ( email )

Maya Papineau

Carleton University ( email )

1125 colonel By Drive
Ottawa, Ontario K1S 5B6
Canada

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