Do emissions and income have a common trend? A country-specific, time-series, global analysis, 1970-2008

This paper analyzes the relation between income and emissions in the period 1970-2008, for all world countries. We consider time-series of CO2, SO2 and GWP100, and use Vector Autoregressive models that allow for nonstationarity and cointegration. At 5\% significance level, income and emissions are found to be driven by unrelated random walks with drift (respectively by a common random walk with drift) in about 70% (respectively 25%) of cases; in the remaining cases the variables are trend-stationary. Tests of Granger-causality show evidence of both directions of causality. For the case of unrelated stochastic trends, we almost never find income driving emissions, as predicted by a consumption-function interpretation. These causality results and the absence of a common trend challenge the main implications of the Environmental Kuznets Curve, namely that the dominant direction of causality should be from income to emissions, and that for increasing levels of income, emissions should tend to decrease.JRC.DDG.01-Econometrics and applied statistic