The Response of CO2 Emissions to Macroeconomic Shocks – A Panel VAR Analysis

Global efforts towards mitigating climate change are gaining momentum. Reducing carbon dioxide (CO₂) emissions and aiming for zero emissions, or carbon neutrality, is a central goal. Economic factors are key determinants of CO₂ emissions resulting from production and energy consumption. This paper empirically estimates the dynamic effects of macroeconomic shocks on CO₂ emissions. For this purpose, we employ an unbalanced panel of 78 countries using annual data from 1990 to 2022 and estimate a panel vector autoregression (VAR) model. The model includes population, GDP, investment, trade, oil price, renewable energy consumption, inflation, exchange rate, and nominal interest rate. We find that GDP and trade shocks lead to significant increases in CO₂ emissions, with the GDP shock peaking at 3.8 % after six years. In contrast, renewable energy consumption and interest rate shocks reduce emissions by up to 1.7 % and 0.6 %, respectively. Results are robust across several sub-samples based on geography, income, population density, and emission trends. These findings imply that greening growth through renewable energy investment can be more effective than relying on monetary tightening. The implications also highlight that all countries, regardless of development stage, have an important role to play in climate action.