CO2 emissions and economic activity: Short- and long-run economic determinants of scale, energy intensity and carbon intensity

We analyze the short-term and the long-term determinants of energy intensity, carbon intensity and scale effects for eight developed economies and two emerging economies from 1973 to 2007. Our results show that there is a difference between the short-term and the long-term results and that climate policy are more likely to affect emission over the long-term than over the short-term. Climate policies should therefore be aimed at a time horizon of at least 8 years and year-on-year changes in emissions contains little information about the trend path of emissions. In the long-run capital accumulation is the main driver of emissions. Productivity growth reduces the energy intensity while the real oil price reduces both the energy intensity and the carbon intensity. The real oil price effect suggests that a global carbon tax is an important policy tool to reduce emissions, but our results also suggest that a carbon tax is likely to be insufficient decouple emission from economic growth. Such a decoupling is likely to require a structural transformation of the economy. The key policy challenge is thus to build new economic structures where investments in green technologies are more profitable. - Highlights: • We model determinants of scale, energy intensity and carbon intensity. • Using band spectrum regressions, we separate between short and long run effects. • Different economic variables affect emission in the short and long run. • CO2 reducing policies should have a long run horizon of (at least 8 years). • A low carbon society requires a structural transformation of the economy