Wednesday, October 20, 2021

Our COVID-19 Paper

Publishing papers on COVID-19 is very popular: 

and we couldn't resist joining the bandwagon. Late last year, Xueting Jiang, my PhD student, and I did a quick literature survey to identify a gap. Though there was a lot of research on how pollution emissions evolved over the course of the pandemic and recession, there was little putting that into the historical context of past recessions. Last year, I worked with Kate Martin, a masters student, on the relationship between carbon emissions and economic activity over the business cycle. We decided to extend that analysis. 

Our new paper uses U.S. monthly data from January 1973 to December 2020. We look at how the relationship between carbon emissions and GDP varies between recessions and expansions, but we also look at individual recessions and how emissions from different sectors vary over the business cycle. 

Like Sheldon and others, we find that, in general, the emissions-GDP elasticity is greater in recessions than in expansions, but we find that this is largely because of sharp falls in emissions associated with negative oil market shocks. The 1973-5, 1980, and 1990-1 recessions were associated with negative oil supply shocks. In 2020, there was instead a negative oil demand shock due to the pandemic. These recessions have emissions-GDP elasticities that are significantly larger than the elasticity in expansions. The elasticities in the 1981-2, 2001, and 2008-9 recessions are no larger than in expansions.

The graph shows NBER recessions in light blue stripes and nominal and real oil prices. The big spike in oil prices in 2008 came at the end of an extended increase associated with rising demand for oil. Of course, supply was constrained during this period but there wasn't a sudden supply crisis. In 1981-82 the price of oil was already falling when the recession started and it is usually regarded as having been caused by the Federal Reserve under Paul Volcker dramatically raising interest rates.

When we regress the growth of sectoral carbon emissions on the growth of national GDP, we find that the asymmetry is present in the industrial and particularly in the transport sector, which are the two largest users of oil in the US economy, using 28% and 66% of the total, respectively.

When we control for oil use, the asymmetries disappear. 

So, though the cause of the COVID-19 recession was unusual the carbon emissions outcome was similar to past recessions associated with oil crises. More importantly, we learned something new about what happens to emissions in recessions, at least in the US.

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