CO2, GDP and Openness: A Vector Error Correction Model Approach for the Eurozone

Abstract

Since the 2015 Paris Agreement, it is obvious that sooner or later the countries will be compelled to align their carbon dioxide (CO2) emissions to the international standards. This paper investigates the transition risk measured by the CO2 emissions and its causal relationships with economic growth and openness thanks to an empirical approach. Given the data availability, the database is based on an annual frequency. It starts in 2008 to end in 2019. The sample takes into account 10 Eurozone countries. We run econometric dynamic specifications by using a vector error correction model (VECM). These models are very flexible and provide interesting information on the short term and the longterm dynamic relationships between the CO2 emissions, the Gross Domestic Product (GDP) and the openness. The impulse function gives interesting results on the variable’s impacts generated by the CO2 emissions and the variance decomposition sheds light on the magnitude of the forecast error variance determined by the shocks to each of the causal variables over time. The main results show negative relationships between the CO2 emissions and the openness and between GDP per capita and CO2 emissions. This conclusion may be useful to review the economic growth factors and the transition risk measured by the CO2 emissions.

JEL: C32, F18, F43, N55, O13, Q56