CO2 emissions and economic activity: A short-to-medium run perspective

This paper looks at the short-to-medium run impact of economic activity on CO2 emissions in the United States, shifting the existing focus away from the long-run Environmental Kuznets Curve (EKC). Our novel methodological approach combines discrete wavelet transforms with dynamic factor models. This allows us to (i) estimate economic and emissions cycles at different frequencies, and (ii) let economic activity be estimated from many different economic variables, rather than focussing on a small number as in existing studies. From our results, one might at first conclude that emissions are not linked to economic activity in the short-run. However, when looking at the cycles uncovered at timescales of length one to three years, we see that there are indeed strong linkages. Policymakers therefore cannot be exclusively long-termist when evaluating the impact of economic policy on the environment.