Modelling the nonlinear relationship between CO2 emissions from oil and economic growth Kuan-Min Wang ⁎ Department of Finance, Overseas Chinese University, 100 Chiao Kwang Road, Taichung, 40721, Taiwan abstract article info Article history: Accepted 2 May 2012 JEL classifications: C33 C22 O10 Q53 Q56 Keywords: Carbon dioxide emissions from oil Economic growth Environmental Kuznets curve Dynamic panel threshold model The purpose of this paper is to examine the relationship between carbon dioxide (CO2) emissions from oil and GDP, using panel data from 1971 to 2007 of 98 countries. Previous studies have discussed the environmental Kuznets curve (EKC) hypothesis, but little attention has been paid to the existence of a nonlinear relationship be- tween these two variables. We argue that there exists a threshold effect between the two variables: different levels of economic growth bear different impacts on oil CO2 emissions. Our empirical results do not support the EKC hypothesis. Additionally, the results of short-term analyses of static and dynamic panel threshold esti- mations suggest the efficacy of a double-threshold (three-regime) model. In the low economic growth regime, economic growth negatively affects oil CO2 emissions growth; in the medium economic growth regime, however, economic growth positively impacts oil CO2 emissions growth; and in the high economic growth regime, the impact of economic growth is insignificant. © 2012 Elsevier B.V. All rights reserved. 1. Introduction As Azomahou et al. (2006) point out, there are two reasons to study carbon dioxide (CO2) emissions. First, the greenhouse gas effect is considered a huge threat to the health of the environment; of the many greenhouse gases, CO2 is the most problematic and the most difficult to manage. In addition, CO2 has a very long lifespan (i.e. 50–200 years). 1 Second, CO2 emissions mostly derive from energy consumption — a crucial factor relating to modern production and consumption in the world economy. CO2 is produced mostly as a re- sult of fossil-fuel consumption — including that of coal, petroleum, and natural gas — and cement production. 2 For these two reasons, the relationship between CO2 emissions and economic growth is of concern to most economists and environmentalists. Regarding studies of the relationship between CO2 emissions and GDP, most of the literature focuses on discussions of the environmental Kuznets curve (EKC). These studies argue that the relationship between the two variables takes the shape of an inverted-U curve. This means that at a relatively low income level, and as income increases, energy consumption will increase as well — which in turn will raise CO2 emis- sion levels and environmental pollution. Therefore, at a relatively low income level, CO2 emissions and income correlate positively. As income increases to a certain higher level, awareness of environmental protec- tion is enhanced, and both people and the government become more willing to spend more resources on enforcing regulations and creating environmental policies, thus leading to decreases in environmental pol- lution and CO2 emissions. The above discussion highlights why the EKC is an inverted-U curve: as income increases, the relationship between income and CO2 emissions switches from a positive number to 0, and then to a negative number. Thus, the income elasticity related to CO2 emissions also changes from a positive number to 0, and then to a neg- ative number, as income increases. When applied to econometric anal- ysis, this phenomenon implies that the estimated relationship between CO2 emissions and GDP could be positive, 0, or negative, depending on the unique economic and environmental status of the country under examination. The income elasticity related to CO2 emissions is a good indicator in studying the relationship between CO2 emissions and GDP. If the income elasticity is greater than 1, it means that the growth rate of CO2 emissions is higher than the GDP growth rate. In such a case, it is said that CO2 emissions and GDP are cross-coupling with each Economic Modelling 29 (2012) 1537–1547 ⁎ Tel.: +886 4 27016855x2383; fax: +886 4 24521646. E-mail address: wkminn@ocu.edu.tw. 1 Scientists estimate that CO2 remains stable in the atmosphere for anywhere from 50 to 200 years (see: http://greennature.com/article281.html). 2 As per the CO2 Emissions from Fuel Combustion Highlights (2010 Edition), total fu- el CO2 emissions across the globe in 1971 were 14096.3 million tons, which increased to 29381.4 million tons in 2008, representing a growth rate of 108.4%. The oil CO2 emissions in 1971 were 6837.8 million tons, which increased to 10821.0 million tons in 2008, representing a growth rate of 58.25%. In 2008, 43% of the CO2 emissions from fuel combustion were produced from coal, 37% from oil, and 20% from gas. The growth rates for these fuels in 2008 were quite different, reflecting varying trends that are expected to continue in the future. 0264-9993/$ – see front matter © 2012 Elsevier B.V. All rights reserved. doi:10.1016/j.econmod.2012.05.001 Contents lists available at SciVerse ScienceDirect Economic Modelling journal homepage: www.elsevier.com/locate/ecmod