Dispelling the smoke: CO2 emissions and economic growth

from a global perspective

DECEMBER 2009
F2

José A. Tapia Granados1 and Óscar Carpintero2

Abstract — This article improves our understanding of the link between CO2 emissions and economic
activity in four ways. First, we discuss the limitations of panel data estimations used in previous studies
for testing the environmental Kuznets curve (EKC) for emissions, i.e., the hypothesis that they will
decline beyond some level of GDP per capita. By using long time series for a number of high-, mid- and
low-income countries we show that the existence of an EKC for CO2 is very doubtful. Second, we
provide an assessment of the hypothesis of an EKC for CO2 emissions in the world economy as a whole
in 1960-2008. The relation between global CO2 emissions and world GDP does not suggest a U-inverted
curve or EKC; a curve in N seems to be more consistent with the data. Third, we estimate the relation
between the growth of global CO2 emissions and the growth of world economic output over the same
period. Regression estimates indicate that (a) each percentage point increase in global economic growth
will raise the rate of growth of global CO2 emissions by 1.2 percentage points; and (b) emissions will rise
whenever the global economy grows annually over 1.5%. Fourth, we show how CO2 emissions and
profits are strongly correlated in the US economy during the second half of the 20th century. Any policy
to cut emissions will likely reduce profits to some extent. Though worrisome, these are major facts to be
considered in discussions about global warming and economic development.

I. Introduction

During recent decades, before the global recession that started late in 2007, economic activity

strongly increased worldwide. Global trade and travel enormously raised the physical movement

of materials and people between regions, nations, and continents. In that same period there was

a substantive increase in CO2 emissions (Quadrelli & Peterson, 2007; Raupach et al., 2007).

Since the 1990s, economists who were skeptical about the ecological constraint to economic

growth pointed to technological progress, to the increasing weight of services in the economy

(the so-called process of tertiarization), and to structural economic change as reasons explaining

1
Program on Social Environment and Health (SEH/SRC), Institute for Social Research, University of Michigan,
Ann Arbor. E-mail: jatapia@umich.edu.
2
Department of Applied Economics, University of Valladolid, Valladolid, Spain.
 2

that in high-income countries the expansion of output has occurred at the same time as the

consumption of energy and raw materials has decreased, a process often referred to as

dematerialization.3 It was similarly asserted that initial phases of economic development are

associated with greater production of garbage and pollution emissions, though at some given

income level there is a turning point where greater GDP growth implies lesser environmental

degradation (also in per capita terms). All this has led some economists to suggest that in most

high-income economies the relation between economic growth and environmental degradation

is an inverted-U curve, the EKC or environmental Kuznets curve—see reviews of this issue in

Stern (2004) and Dinda (2004). Some authors have supported this hypothesis with respect to

air pollutants such as SO2, NO2, or suspended particulate matter, and water contaminants such

as coliform bacteria (Grossman & Krueger, 1991; Shafik & Bandyopadhyay, 1992; Shafik, 1994;

World Bank, 2000). The historical tendency to relative “decarbonization” (Grübler &

Nakicenovic, 1996; Nakicenovic, 1996; Sun & Meristo, 1999), understood as a decrease in

carbon emitted per unit of primary energy consumed, also led some to think that the EKC could

be also confirmed for CO2 (Holtz-Eakin & Selden, 1992; Roberts & Grimes, 1997; Schmalensee,

Stoker, & Judson, 1998). From the economic point of view, since CO2 is invisible and has no

smell, it was never considered as waste.4 However, it is a waste produced in many human

activities, as modern science has shown.

CO2 global emissions from fossil-fuel burning and industrial processes have accelerated in

recent years, increasing annually on average 1.1% during the 1990s and over 3% in 2000–2004

3
See Cleveland & Ruth (1999)for an excellent review of this issue. According to de Bruyn & Opschoor (1997),
relative or weak dematerialization would imply a drop in energy and matter requirements per GDP unit, while and
absolute or strong dematerialization would mean a drop in total natural resources used for economic activities at the
same time that production increases.
4
The same could be said about HFC gases that destroy the ozone layer, carcinogenic substances such as asbestos,
and many other types of “invisible waste.” This indicates the limitations of the concept of negative externality to
analyze ecological issues. Since production of goods is impossible without producing unwanted residuals or bads at
the same time, any production process must be modeled as a joint production process (Baumgärtner, Faber, &
Schiller, 2006; Georgescu-Roegen, 1971).
 3

(Raupach et al., 2007), and emissions from fossil fuel increased by 29% between 2000 and

2008, so that the growth of emissions since 2000 has been greater than for the most fossil-fuel

intensive emissions scenarios developed in the late 1990s by the Intergovernmental Panel on

Climate Change (Le Quéré et al., 2009). As a result, economic debates have arisen on the

implications of global warming and the best policies to cut emissions (Nordhaus, 2008; Spash,

2002; Stern, 2007).

Since economic activity requires energy, and CO2-generating combustion is the primary

source of energy in modern societies, the intensity of economic activity and the volume of

annual CO2 emissions should be strongly correlated. But is there evidence to support that? This

article elaborates on that question and its implications.

The structure of the article is as follows. Section II discusses previously published literature

on an EKC for CO2. Historical facts and data on the link between emissions and economic

growth, for national economies and for the global economy as a whole, are presented

respectively in sections III and IV. Section V is a discussion of the political economy of

emissions, and section VI presents our conclusions. Some considerations on the data are

presented in an appendix.

II. Is there any solid evidence for an environmental Kuznets curve for CO2?

In considering the relation between economic growth and CO2 emissions, there are three

peculiarities that cannot be ignored. First, unlike contaminants such as SO2, suspended

particulate matter, or coliform bacteria, which have a local dimension, CO2 is a “pollutant” of

global dimension which is the major cause of global climate change. Second, while the

estimation of an EKC for pollutants with a local dimension has been generally restricted to the

last decades of the 20th century, for CO2 the available data allow for estimations from the mid

19th century to the present. Third, and most important, studies trying to show an EKC for CO2

have been quite late compared with those for other pollutants and from the start they provided

scant support for the hypothesis of a EKC for CO2 emissions. Grosman and Krueger (1991)
 4

estimated the EKC for several pollutants, excluding CO2, but Holtz-Eakin and Seldin (1992)

incorporated CO2 into the analysis using panel data from 130 nations for the years 1951-1986.

What they found was a tipping point for CO2 emissions in terms of GDP per capita (about US$

35,000) that was out of the range of the sample when a quadratic time trend adjustment was

used. With a logarithmic adjustment, the tipping point occurred at an even higher level (US$ 8

million). Using panel data for 1962-1986 from 149 countries, Shafik (1994). could not find any

evidence in favor of an EKC for CO2, but found a clear positive dependence between income and

CO2 emissions, with a one percentage-point increase in income implying an increase of 1.62% in

emissions.

In spite of these results, Schmalense et al. (1998) posed the existence of an EKC for CO2

during the second half of the 20th century and, furthermore, predicted the existence of such

curve for the period 1990-2050. For these authors, the large majority of high-income countries

had already reached the turning point in the 1970s (for instance, in 1973 in the United States),

and therefore the increase in GDP per capita in the future would just lead to further reductions

in emissions and improvements in environmental quality.5

Several recent publications have disputed, on both theoretical and empirical grounds, the

goodness of fit of EKC models for CO2 and the extent to which the results are generalizable

(Arrow et al., 1995; de Bruyn, van den Bergh, & Opschoor, 1998; Dijkgraaf & Vollebergh, 1998;

Dijkgraaf & Vollebergh, 2005; Ekins, 1997; Müller-Fürstenberger & Wagner, 2007; Richmond &

Kaufmann, 2006; D. I. Stern & Common, 2001; D. I. Stern, 2004; Wagner, 2008). EKC models

have been found unsupported by the data, and researchers have also posed issues of

heterogeneity and autocorrelation in the panel regressions that would made parameter

estimates biased and inconsistent in the models suporting the EKC. Particularly interesting is

5
We will not comment on the work by Roberts and Grimes (1997) that also defends the existence of an EKC for
CO2 in the period 1962-1991. These authors interpret the EKC as a relation between GDP per capita and intensity of
emissions (CO2/GDP). This leads to results and conclusions that are different from the ones of concern to us. A
similar equivocal interpretation is that of Sun and Meristo (1999).
 5

the article by Dijkgraaf and Vollebergh (2005), exposing the econometric weaknesses, biased

estimations, and inconsistencies in the the panel model results by Schmalensee et al. (1998).

Since panel data with few years and many countries pose major statistical issues, authors have

often focused on the analysis of long national time series that, in the case of the United States,

failed to reveal an EKC (Huntington, 2005; Tol, Pacala, & Socolow, 2009). An EKC for CO2

could not be found for Spain either considering the long period 1850-2000 (Rubio, 2005), or

using data for 1950-2000 (Carpintero, 2005; Roca & Alcántara, 2001; Roca, Padilla, Farré, &

Galletto, 2001). Using data for this period (Bartoletto & Rubio, 2008) could not find an EKC for

Italy.6

Notwithstanding that solid evidence supporting an EKC for CO2 is manifestly missing and an

emerging consensus holds that the curve might be shaped as an N (de Bruyn et al., 1998) rather

than as an inverted U, some economists still speak as if that U-inverted curve were

demonstrated. We believe the factual evidence does not support these claims.

III. National economies and CO2 emissions: historical evidence

Both total and per capita CO2 emissions have been generally growing in all countries of the

world during the 20th century (Raupach et al., 2007), but over the long-term growth of

emissions, there have been many short-term fluctuations. Since the objective of policies to

prevent global warming is to reduce CO2 emissions, an obviously interesting issue is to ascertain

in what countries and in what periods emissions decreased during the years for which emission

data are available. For that purpose, starting with the 48 nations that had population over 20

million at the end of the 20th century, and smoothing the curves of total emissions with a 5-year

centered moving average, we computed the mean annual rate of trend growth for each

quinquennia of the period 1950-1999. The pattern is very suggestive of decreasing CO2

6
Lindmark (2002) and Kriström and Lundgren (2005) suggest an EKC curve for the Swedish economy during the
20th century, but relating income level with the level of emissions intensity (CO2/GDP), not with the level of total
or per capita emissions.
 6

emissions with periods of weak economic growth and rising emissions during expansions. There

was not even one country in which emissions decreased in 1950-1955 (table 1), and only in a few

Third World countries emissions decreased in 1955-1969. This is very consistent with the fact

that in the 1950s and 1960s the world economy grew “much faster than it had ever done before”

(Maddison, 2001). Emissions declined in China in the early 1960s, a period of strenuous

economic restructuring after an extreme disruption of the economy in 1960, during the so-called

Great Leap Forward (Zhang & Fan, 2003). In the 1970s emissions decreased in more countries,

and in each of the quinquenia of the 1980s and 1990s about a dozen countries had negative

growth of emissions. All these declines in emissions coincide with the economic downturns of

these decades, when unemployment rates grew in many countries to reach double-digit levels.

While in the 1950s-1960s emissions decreased in just a handful of low-income economies, in the

1980s emissions decreased in the United States, West Germany, the United Kingdom, Canada

and other high-income countries, probably as a consequence of energy saving and energy

efficiency policies implemented as a response to rising petroleum prices and the oil-embargo

triggered by the Yom-Kippur war.

A different pattern is that of the 1990s (table 1), when major declines in emissions occurred in

Eastern Europe and the nations formerly part of the USSR. All these nations suffered major

reverses during the 1990s, when sudden political liberalization and economic transition from

central planning to liberalized markets coincided with major drops in economic activity, rising

poverty and serious increases in adult mortality (Stillman, 2006). The drop in emissions in these

countries was dramatic. For instance, while on average emissions dropped in the early 1980s a

little over 1% per year in the United Kingdom and a little below 1% in the United States, in

Romania emissions dropped around 5% per year in each of the two quinquennia of the 1990s,

and in Ukraine emissions dropped 5.2% per year in the late 1990s.

We also examined in what years and countries, among the nations with population over 20

million in 2000, the annual growth of emissions, total or per capita, was high or low since the
 7

1920s to the present. With very few exceptions, total emissions decreased in the early 1930s

(results not shown), the time of the Great Depression that affected most market economies

worldwide. Contrarily, strong and sustained annual increases—over 4%—in total emissions

(figure 1, 1st panel) are particularly concentrated in the 1920s, and the 1950s- 1960s. In the

1950s-1960s there were also large increases in per capita emissions (figure 1, 2nd panel). Since

in many countries both total and per capita emissions have also increased over 4% per year in

the most recent decades (figure 1), neither in terms of total emissions nor per capita CO2

emissions does the international experience of the last half century suggest that emissions

stabilize or drop after some level of income per capita is reached.

Considering the special case of US economy, its annual rate of growth and the rate of growth

of US emissions of CO2 follow each other very closely (figure 2). Emissions dropped strongly in

the recession of the early 1920s, but they dropped much more lastingly and deeply during the

Great Depression in the early 1930s, and again in 1938, in the so-called Roosevelt recession, and

again in the recessions of 1949, the mid 1970s, and the early 1980s.

For the United States, the correlation of the rate of growth of emissions with the rate of

growth of real GDP is 0.53 (P < 0.0001) for the years 1801-2002 and is also strongly positive for

all the subperiods of these two centuries. Examining the correlations between the annual GDP

growth and the annual increase in emissions (both stationary series) during the four consecutive

half-centuries between 1800 and 2000 (table 2), it seems that the link between economic

growth and growth of CO2 emissions strengthened with the passage of time, since the

correlation goes up in each consecutive 50-year period, from 0.37 (P < 0.01) in the first half of

the 19th century to 0.74 (P < 0.0001) in 1950-1999. Comparing the correlations during shorter

periods of 25, 10, or 5 years, that impression does not seem to be confirmed as, for instance,

during the 1990s the correlation is only 0.19, while during the 1980s it was 0.81. But is there any

pattern here?
 8

The three decades of the 20th century in which the link between economic activity and CO2

emissions is the weakest (the smallest decadal correlations, table 2) are the 1910s (r = 0.46), the

1940s (r = 0.52) and the 1990s (r = 0.19). For the 1910s and the 1940s, the most likely

explanation of this low correlation between GDP growth and growth in emissions is war, since

compared to other quinquennial correlations in the century, the correlations are particularly

small in the quinquennia 1915–1919 and 1940–1944 (table 2), including the years in which the

United States was involved in World War I (1917-1918) and World War II (1942-1945). These

two war periods coincide with strong drops in car sales and restrictions for the civilian use of

fuel. During the 20th century the only negative quinquennial correlation between growth in

emissions and GDP growth, –0.46, occurs in 1940-1944, during World War II (table 2), when

strict rationing of fuel consumption for private use was imposed, and sales of passenger cars

dropped to zero (they were forbidden, to help in the war effort), from almost 4 million cars sold

per year in 1940 and 1941. Compared with the immediate prewar level (1941), during the years

of war rationing motor vehicles traveled almost 40% less distance and consumed about 33% less

fuel, though collective transportation by bus strongly increased (Carter et al., 2006). As a

consequence of these and probably other changes in the use of fuel, the rate of growth of CO2

emissions fell abruptly—though remaining positive—from a peak of 13.7% in 1940 to a trough of

3.3% in 1943. At the same time, GDP was growing at rates close to 20% because of an enormous

wartime industrial output.

The extremely low correlation between growth in emissions and GDP growth during the 1990s

as a whole (0.19), and during each of the halves of this decade (0.28 and 0.26), compared with

correlations around 0.8 in the 1970s and 1980s, could be interpreted as a reason for optimism—

indicating perhaps a decoupling of CO2 emissions and economic growth. In some sense, that is

true, but the decoupling regrettably occurred in the wrong way. Indeed, while in the 1970s the

trend growth of emissions was 0.9%, and in the 1980s 0.6%, in the 1990s emissions grew at a

much faster rate, an annual average of 1.8%. Between 1989 and 1991, economic growth dropped
 9

almost 4 percentage points but the rate of growth of emissions dropped between 1989 and 1990

and then increased between 1990 and 1991 (figure 2). Contrarily, between 1997 and 1998

emissions dropped slightly, by 0.9%—very likely as a consequence of a major rise in oil prices in

1996-1997—while GDP expanded 4.2%. These two outliers (in 1991 and 1997) strongly reduce

the correlation between GDP growth and growth in emissions in that decade.7

For a sample of wealthy and emergent countries (G-20), the correlations of GDP growth with

the annual growth in either total emissions or emissions per capita (table 3) provide further

confirmation of the link between economic growth and the growth of emissions. Moreover, the

strong linkage between growth in emissions and GDP growth occurs not at the initial levels of

economic development, but when GDP per capita reaches at least medium levels. The

increasingly strong positive correlation between economic growth and growth in emissions

(both total and per capita) with the passage of time also appears in Brazil, India, Mexico, and the

USSR (table 3). The link, however, seems to be very weak or nonexistent in countries at very low

levels of GDP per capita.

Comparing the correlations of emissions with GDP growth (table 3) in the period before and

after 1970 in high-income countries such as the United Kingdom, France, or Germany, we can

see a delinking of GDP growth and growth in emissions, since the correlations are somewhat

lower (for both total and per capita emissions) in the most recent decades. An optimistic

explanation might be that a high level of development creates conditions for the decarbonization

of the economy, by making both production and consumption uses of energy much more

efficient. A more likely explanation is however that in these countries the industrial base was

displaced by a service economy at the same time that nuclear energy became a major source of

7
All the correlations reported here were computed using CO2 emissions data from CDIAC (data sources are
explained in the appendix). Using annual emissions (from 1950 to the present) from EIA, the correlations for
particular periods change a little, but the general pattern is the same. The annual growth rates of emissions with
CDIAC and EIA data correlate at 0.92. The correlations of the annual growth of emissions with GDP growth are
0.79 with EIA data and 0.72 with CDIAC data.
 10

energy supply.8 But, regrettably, it is very unlikely that energy use and CO2 emissions in these

countries implied by national consumption have actually been reduced, since through

international commerce the energy consumption and CO2 emissions associated with production

and consumption in these countries have been displaced to the rest of the world, from which

goods are then imported to a “clean” economy (Le Quéré et al., 2009; Suri & Chapman, 1998;

Taskin & Zaim, 2000). Indeed, in countries such as Australia, Canada, and the United States,

high levels of emissions per capita for high levels of GDP per capita are observed (figure 3),

suggesting an N-shaped, rather than a U-inverted curve. In-high income countries such as Italy

or Japan, where the industrial sector was still a major component of the economy in the late 20th

century, it seems that international trade was not able to push the relation between economic

growth and CO2 emissions downward to the right side of the EKC, and the connection between

economy and emissions strengthened (table 3, figure 3).9

Available data for some countries allow us to examine the short-term strength of the link

between GDP growth and growth in CO2 emissions by computing correlations for a moving

window of several years throughout a period of many decades. Correlations for moving windows

of 10 years for Finland, France, Italy, and Japan (figure 4) show that the decadal correlation

between emissions and GDP growth has been strongly positive all throughout the 20th century.

Though there have been some periods in which the correlation has been close to zero, neither in

these countries nor in others (results not shown) is there any pattern suggestive of a weakening

of the link between growth in GDP and growth in emissions with the passage of time.

In summary, historical evidence strongly suggests that drops in emissions have occurred in

periods in which economic activities shrank, as occurred in the West in the 1930s and the 1980s

8
In France the nuclear power share of electricity generation grew from 25% to 77% between 1980 and 2000; in
United Kingdom it increased from 12% to 23%; in Germany, from 26% to 38%. Consequences of this energy
strategy are the increasing risk associated with electricity generation, and the production of substantial quantities of
radioactive waste.
9
In most OECD countries the relation between CO2 emissions per capita and GDP per capita is rather N-shaped
curve—as it is for Australia, Austria, Canada, Finland, Ireland, Italy, Japan, Norway, or the United States—or even
linear—as in the case of Greece, Portugal, South Korea and Spain (figure 3 present the graphs for the OECD
countries also members of the G-20).
 11

and in the East in the 1990s. It shows that in periods of accelerated global economic growth like

the 1950s and the 1960s, both total and per capita CO2 emissions strongly increased.

IV. World economy and global CO2 emissions

Considering the long-term trends in the period from 1960 to the present, world population,

world GDP per capita, and total CO2 emissions have been steadily growing (figure 5, panels A to

C), while emissions per capita grew quite steadily until the 1970s and then oscillated without a

clear trend from the 1980s to the present (figure 5, panel D). All these trends put together imply:

(a) that total CO2 emissions steadily increased with the level of income (GDP) per capita (figure

5, panel E); and (b) that per capita emissions monotonically increased with the level of income,

but only until a level of approximately 3500$ per capita (figure 5, panel F), then oscillated

without a clear trend for greater levels of income.

Modeling in quadratic and cubic models the relation (plotted in figure 5, panel F) between

world per capita emissions as dependent variable and world income per capita as explanatory

variable, the fit of the cubic model is better (for the cubic model R2 = 0,90 Akaike information

criterion, AIC = –197.8; for the quadratic model R2 = 0.70, AIC = – 146.7). This means that for

the world economy as a whole, with data on emissions and output per capita for half a century, a

(cubic) curve in N is more consistent with the data than an EKC for CO2 emissions (quadratic)

curve in inverted U.10 Though the sample on which these conclusions are inferred is relatively

small, the curve of per capita emissions vs. per capita income seems therefore to be for the world

economy quite similar to the N-shaped curve of countries such as Canada, Italy, or Japan (figure

3), rather than the U-inverted curve of France or Germany.

The annual growth of total emissions can be posited as the sum of the growth of population

and the growth of emissions per capita (figure 5, panels G and H). Since population growth is

quite steady, though declining in the long run (it has diminished to about 1% in recent years

10
Similar results were obtained using quadratic and cubic models for the countries considered of high income by the
World Bank. The R2 values for the cubic models were 0.90 for the sample of high-income countries, and 0.87 for the
sample of OECD members. For the sample of non-OECD high income countries, the linear model R2 was 0.96.
 12

from over 2% in the 1960s), both the annual growth of total emissions and the growth of

emissions per capita (both fluctuating in a range from approximately – 6% to 7% in recent

decades) strongly depend on the fluctuations of the world economy. Big declines in emissions,

like the one from the late 1970s to the early 1980s or the one in the early 1990s, strongly

correlated with downturns in the world economy (figure 6). Statistical results provide formal

evidence supporting this conclusion.

The correlation between the growth of global emissions and global GDP growth (available

from the 1960s to the present in estimates from the World Bank) is 0.77 (P < 0.0001) for the

years 1961-2008 (figure 6). Since the augmented Dickey-Fuller (ADF) test results allow us to

reject the hypothesis of unit roots for both series (P < 0.01), they must be considered stationary

and the high correlation between their oscillations is major evidence that either the series are

causally correlated or a third variable is causing both.

Modeling in a linear regression the annual percentage growth of CO2 emissions (xt) as a

function of the annual growth of global GDP (gt), the equation, estimated (by OLS) for the years

1961-2008 is as follows (the error term is omitted and the standard errors are below the

parameter estimates):

xt = – 1.78 + 1.22 gt R2 = 0.59 Durbin-Watson d = 1.63

(0.57) (0.14)

Since both economic growth and the growth of CO2 emissions are measured as percentages,

the estimated parameter, 1.22, implies that the expected effect of one percentage point increase

in global economic growth is to raise the rate of growth of emissions by 1.22 percentage points

(the estimate is highly significant, with P < 0.0001, and its 95% confidence interval is 0.94 to

1.49). The model predicts 59% of the variability of the annual rate of growth of emissions and its

Durbin-Watson d not much below 2 indicates quite low levels of autocorrelation of the residuals.

The estimated equation implies that for global economic growth equal to zero, CO2 emissions

will drop 1.78% annually, while CO2 emissions will be invariant for an annual global economic

growth of 1.5% (gt = 1.78/1.22 = 1.46 ≈ 1.5). Therefore, according to this model, 1.5% is the cut-
 13

off point: higher levels of economic growth will raise CO2 emissions, lower levels of growth will

reduce them.

Adding to the model lagged terms for economic growth, AIC increases and the parameter

estimates for the lagged effects are not significant. The effect occurs at lag zero, so that increases

or decreases of global economic growth translate into emissions growing or falling the same

year.

Since the sources for estimating CO2 emissions and GDP—both for individual countries and

for the whole world—have many common components, a skeptical view might be that common

errors in data cause common oscillations of the two series, so that the observed positive

correlations between growth of emissions and growth of GDP are spurious. We believe that this

explanation is unlikely for two reasons: first, because correlated estimates of economic growth

and CO2 emissions are from different sources; and second, because GDP estimates incorporate

many activities that have monetary outcomes (such as banking, health care, or education) with

less direct translation in CO2 emissions. However, for the sake of thoroughness we mention this

possible explanation of correlations that, at face value, indicate a remarkable link between the

level of global economic activity and the worldwide level of CO2 emissions, with all the

implications that this link has for economic policy and the prevention of global warming.

V. Profits and CO2 emissions

Profits appears rarely in modern economic investigations but they were a key variable to explain

the functioning of the market economy for almost all major economists of the past (Marx, 1981;

Mill, 1844; Schumpeter, 1983; Smith, 1937). For Wesley C. Mitchell, who dedicated his life to the

empirical study of business cycles, profit was a central concept to understand modern

economies. He even used the terms “profit economy” and “money economy” as general

descriptors to refer to what others call “market economy” or “free enterprise system” or

“capitalism.” Where the money economy dominates, wrote Mitchell, “natural resources are not

developed, mechanical equipment is not provided, industrial skill is not exercised, unless
 14

conditions are such as to promise a money profit to those who direct production” (Mitchell,

1913). Indeed, both theoretical considerations and empirical data indicate that there is a link

between profits and the emissions of CO2 on which this investigations has focused.

Statistical evidence that CO2 emissions and profits are linked is found for instance in the

correlation between emissions and profits in the U.S. economy. When both profits and CO2

emissions are transformed into an annual rate of growth (both are stationary series, figure 7),

their correlation is 0.67 (P < 0.001) for the years 1935-2005, 0.74 (P < 0.001) for 1935-1970 and

0.42 (P < 0.05) for 1971-2005.

For firms involved in extraction of fossil fuels and petroleum, any cut in emissions implies a

cut in sales and, therefore, a cut in profits. This is a major reason for these firms to constitute

“special interests” opposed to policies to reduce CO2 emissions. However, the coal and

petroleum business interests are not the only ones seriously concerned by policies to cut

emissions. The automobile industry, the transportation sector, and corporations in many other

sectors of the economy would have their profits cut by any effective policy to reduce emissions.

Though with different levels of intensity, CO2 emissions are implied by almost any economic

activity and almost any business, which means that, in general, policies to reduce emissions will

very likely reduce business profits. Policies to cut emissions and prevent global warming will

therefore very likely be opposed by business interests. Indeed, “think tanks” and “research

institutes” funded by corporations and the business community have been for many years the

most conspicuous skeptics of the contribution of CO2 emissions to global warming.

CO2 emissions causing global warming can be compared to tobacco and its harmful

consequences for health. For years tobacco manufacturers denied the harmful nature of

smoking and the causal link between tobacco and heart disease, cancer, and other ailments, in

the same way that business lobbies denied global warming and its link to CO2. Worldwide

tobacco sales reached billion-level figures many decades ago, providing huge profits to tobacco

manufacturers, but they were just a minor part of the economy, and eventually, after decades of
 15

research, reports of public health officials, and public action to overcome tobacco lobbying,

tobacco manufacturers were forced in many countries to print on cigarette packages messages

indicating the harmful nature of smoking, and laws and regulations to prevent tobacco addiction

were passed. Eventually, smoking prevalence started to decrease among the population in many

countries, though tobacco manufacturers continue promoting its products and therefore

nicotine addiction whenever possible.

Electricity and heat generation presently produce 40% of CO2 emissions; adding the 24% of

transport, they account for nearly two-thirds of global emissions. These two sectors are also the

major determinants of the increase in emissions in recent years (Quadrelli & Peterson, 2007). In

the same way that policies to restrict the production, sale and consumption of tobacco products

are key to avoid a major burden of disease and early death, policies to restrict transportation

and energy consumption to produce electricity, heating or cooling are key to cut emissions.

Indeed, energy and transportation policies could be greatly beneficial, not only to reduce energy

dependency and preserve local natural environments, but also to promote health, reduce

avoidable costs, and create jobs. By generating local production and employment, and

promoting physical exercise, they would prevent pollution, traffic jams, the continuous spread of

the modern pandemics of obesity and cardiovascular disease, and enormous costs in

infrastructure, heating and cooling connected to urban sprawl and the abundance of cars.11 But

the urban sprawl itself, the automobile industry, and commerce at long distances are linked to

powerful interests, since enormous profits are obtained of the economic activity maintaining

them. Indeed, many modern societies can be considered as “severely addicted” to urban sprawl,

private cars, frequent transportation of goods and people by motor vehicles and planes, and

11
Joan Robinson noticed with her habitual insightfulness that many kinds of consumption that are chosen by some
individuals generate disutility for others. “The leading case is the spread of private motor cars—the higher the level
of consumption, the more uncomfortable life becomes; this fact is painfully obvious, but orthodox [economic]
doctrine has not been able to accommodate it” (Robinson, 1981, p. 31).
 16

consumption of goods produced continents away. For the future of humanity these addictions

can be equivalent to that of a person smoking a couple of packs a day.

VII. Concluding remarks

There is overwhelming evidence linking economic growth with CO2 emissions. Therefore,

recessions are “good news” in terms of prevention of global warming. The severe drops in

industrial activity, transportation, and consumption of fuels that have occurred worldwide from

the fall of 2007 will immediately translate into smaller emissions, providing temporary relief in

terms of reducing the high speed at which humanity is approaching a climate crisis due to

greenhouse gases.

However, profit seeking and permanently increasing production are basic components of our

economy, and when the economy is in periods of “prosperity,” both elements work together

against any effective policy to cut CO2 emissions. Indeed, the observed acceleration of emissions

during the 1990s and the present century throws major doubts on the effectiveness of carbon

trading schemes now in place in a number of countries to supposedly cut emissions in a

business-friendly manner.

Whatever the outcome of the present world economic crisis, it would not be a good thing to

come back after it to a business-as-usual scenario of “prosperity” in which waste production as

an unavoidable component of economic activity is ignored, CO2 emissions continue rising, and

our economic system pushes us over the cliff of irreversible climate change.

The historical and statistical evidence that economic growth and CO2 emissions are linked is

strong, and there is no evidence at all that the connection between both variables has been

waning with the passage of time.12 Contrary to assertions that emissions of CO2 will likely drop

12
We have not discussed the assertion by some authors (Anderson & McCormick, 2007) that economic activity
induces carbon sequestration and therefore reduce the net emissions of CO2. This is valid only for some activities
like forestry, and it is misleading when applied to the economy in general, where most activities, even agricultural
ones implying CO2 capture from the atmosphere, produce net emissions of CO2 because of the associated
consumption of energy produced by combustion. The 2004 concentration of CO2 was 377 parts per million by
 17

with further economic growth, the historical and statistical evidence indicates that faster

economic growth will be associated with faster increase in emissions. Furthermore, it is likely

that policies to cut emissions also cut profits and are actively opposed by business interests.

Though worrisome, these are major issues to be considered in discussions about global

warming, economic development, and economic policy.

Appendix: Sources of data and some issues of reliability

CO2 emissions for all countries are from the Carbon Dioxide Information Analysis Center

(CDIAC), Oak Ridge National Laboratory, U.S. Department of Energy (Marland et al., 2008),

though we also examined U. S. data from 1950 to the present from the U.S. Energy Information

Administration (EIA, 2009). Though we refer in the article to CO2 emissions, CDIAC data are

actually emission estimates in tons of carbon. Since measurements in tons of CO2 would imply a

simple change in scale, we have allowed us this small inconsistency. Corporate profits series are

from U.S. NIPA table 1.10, “Gross Domestic Income by Type of Income National” (BEA, 2008);

GDP international data from The World Economy: Historical Statistics (Maddison, 2003),

except for the United States, in which case GDP data are from Historical Statistics of the United

States—Millennial Edition (Carter et al., 2006). We are conscious of the theoretical issues

implied by computing GDP figures for centrally planned economies (such as the USSR or China

before the 1980s) in which most prices are controlled and markets are severely restricted, but we

simply used Maddison data as-is. We became suspicious of the reliability of Maddison GDP data

for the United States upon observing that in that series, GDP grew at a constant rate of exactly

4.0% per year between 1871 and 1890.

volume (ppmv), about 35% higher than the concentration in preindustrial time and the fastest growth of CO2
concentration has occurred in the most recent period 1999–2004, when it increased about 1.8 ppmv per year
(Quadrelli & Peterson, 2007). The supposed carbon sequestration created by economic activity must therefore be
considered no more than a myth.
 18

We are also conscious that any estimate of GDP implies many assumptions and guesswork,

and its reliability as a measure of the total value added by annual economic activity in a country

diminishes exponentially the farther the estimate refers to the past (Morgenstern, 1950; Maier &

Easton, 1999). However, errors or inappropriate assumptions in estimating GDP have much less

effect on the ability of its rate of growth to gauge the dynamic status of the economy, and with

that caveat we use GDP historical figures.

CO2 emission estimates for each nation or territory are computed from data on CO2 sources

such as production and consumption of coal and all other fossil fuels, and cement production, as

well as changes in national fuel stocks. Global total emissions include estimates for the oxidation

of non-fuel hydrocarbon products such as asphalt, lubricants, etc., that are not considered in

national totals (CDIAC, 2009). According to an email from Tom Boden, director of CDIAC and

coauthor of the emission estimates, negative estimates for select years and countries are

artifacts of the underlying production and trade data and accounting methodology. For example,

negative values for Mexican CO2 emissions in 1914 are due to the fact that the only data available

for Mexico were export data, with no production data available. If a country exports more coal

than it imports or mines, this would also result in a negative net apparent consumption of coal.

The methodology of computing CO2 emissions imply that when fuel is converted from one form

to another, e.g., liquid to gas fuel, the liquid accounts are debited while the gas accounts are

credited, which may result in some cases in negative liquid emissions.

Annual growth rates for the world economy and for the world population for the years 1960–

2008 are from the World Bank. The series of world GDP and world GDP per capita were

computed from the series of real growth rates and the world GDP for 1990 according to the

World Bank. The same procedure was used for the countries included in Figure 3.
 19

Table 1. Nations with populations above 20 million in 2000 in which the rate of
growth of CO2 emissions was negative in some of the quinquennia of the period
1950–1999
Average annual rate of growth of
Years Nationa CO2 emissions (%)
1955 - 1959 Morocco – 0.9
Venezuela – 0.7
Zaire – 3.4
– 4.7
1960 - 1964 China
Zaire – 1.7
– 1.6
1965 - 1969 Egypt
– 3.4
1970 - 1974 Ethiopia
Uganda – 3.6
United Kingdom – 0.7
Venezuela – 0.6
– 0.3
1975 - 1979 West Germany
France – 0.2
Iran – 0.9
Sudan – 4.2
Uganda – 8.4
United Kingdom – 0.7
Tanzania – 3.4
Viet Nam – 2.2
– 0.1
1980 - 1984 Argentina
Canada – 1.0
West Germany – 1.7
France – 3.9
Italy – 0.7
Japan – 0.3
Kenya – 4.1
Peru – 1.4
Philippines – 2.3
Spain – 1.2
United Kingdom – 1.2
United States – 0.7
– 3.9
1985 - 1989 Afghanistan
West Germany – 0.2
France – 0.6
Myanmar – 4.5
Nigeria – 3.8
Poland – 2.9
Romania – 3.0
Tanzania – 0.1
Viet Nam – 0.2
Yugoslavia – 0.3
 20

Table 1 (cont.). Nations with populations above 20 million in 2000 in which the
rate of growth of CO2 emissions was negative in some of the quinquennia of the
period 1950–1999
Average rate of growth of CO2
Years Nationa emissions
1990 - 1994 Afghanistan – 9.7
France – 0.6
Nigeria – 3.7
Poland – 1.6
Romania – 5.9
Sudan – 2.4
United Kingdom – 1.3
Zaire – 6.0

1995 - 1999 Afghanistan – 6.3

China – 0.5
Colombia – 1.5
North Korea – 14.2
Germany – 0.8
Poland – 2.4
Romania – 4.7
Russian Federation – 1.7
Saudi Arabia – 1.7
Ukraine – 5.2
Tanzania – 0.6
Zaire – 5.3
a China refers to the mainland, Italy includes San Marino, and France includes Monaco.
b Computed from CDIAC data as 20 · [(xt–xt-5)/ xt-5] where xt is the value of CO2 emissions for year t after smoothing
the series by using a 5-year moving average to avoid allowing the average annual rate of growth to be strongly
influenced by extreme values of emissions in the years beginning or ending the quinquennia. The average
quinquennial rate of growth was also computed by smoothing the series of emissions with the Hodrick-Prescott filter
(using a smoothing parameter of either 6.25 or 100), and the results were quite similar.
 21

Table 2. Correlations (r) between annual GDP growth and the

annual rate of growth of CO2 emissions in the United States, in
different periods of the years 1800-2002
Period r Period r
1800-1849 0.37 Quinquennial correlations
1850-1899 0.47 1900-1904 0.77
1900-1949 0.62 1905-1909 0.66
1950-1999 0.74 1910-1914 0.72
1800-1824 – 0.07 1915-1919 0.36
1825-1849 0.55 1920-1924 0.67
1850-1874 0.69 1925-1929 0.98
1875-1899 0.31 1930-1934 0.85
1900-1924 0.54 1935-1939 0.97
1925-1949 0.73 1940-1944 – 0.46
1950-1974 0.74 1945-1949 0.20
1975-1999 0.71 1950-1954 0.82
Decadal correlations 1955-1959 0.81
1900-1909 0.68 1960-1964 0.80
1910-1919 0.46 1965-1969 0.45
1920-1929 0.69 1970-1974 0.72
1930-1939 0.88 1975-1979 0.92
1940-1949 0.52 1980-1984 0.94
1950-1959 0.78 1985-1989 0.29
1960-1969 0.56 1990-1994 0.28
1970-1979 0.79 1995-1999 0.26
1980-1989 0.81 2000-2002 0.99a
1990-1999 0.19
a
n=3
Source: Computed by the authors from CDIAC data on U.S. emissions and real GDP growth
from Historical Statistics of the United States (Carter et al., 2006).
 Table 3. Correlations between annual economic growth and growth in CO2 emissions, for the member countries of the Group of Twenty (G-20)
in the period 1921–circa 2006
GDP growth and growth of Growth of GDP per capita and
Growth of GDP per capita and growth of total emissions growth of per capita emissions
GDP growth and growth of total emissions per capita emissions (computed with (computed with World (computed with World Bank
Country (computed with Maddison historical data) Maddison historical data ) Bank data) data)
1921- 1950- 1971- 1961- 1921- 1921- 1950- 1971- 1961- 1921-
1949 1970 2006 2006 2006 1949 1970 2006 2006 2006 1971-2006 1961-2006 1971-2006 1961-2006
Argentina 0.43 – 0.09 0.62 0.21 0.64 0.37 – 0.12 0.63 0.64 0.18 0.60 0.63 0.60 0.63
Australia 0.42 0.63 0.23 0.44 0.39 0.43 0.58 0.23 0.35 0.42 0.12 0.23 0.12 0.23
Brazil 0.37 0.38 0.74 0.47 0.75 0.37 0.40 0.73 0.73 0.45 0.72 0.71 0.71 0.69
Canada 0.47 0.30 0.27 0.45 0.34 0.48 0.42 0.27 0.29 0.46 0.27 0.35 0.26 0.29
China 0.53 0.49 0.42 0.68 0.51 0.51 0.65 0.38 0.32 0.74 0.35 0.73
France 0.86 0.26 0.41 0.78 0.52 0.84 0.39 0.39 0.48 0.77 0.45 0.54 0.43 0.50
Germany – 0.31 0.77 0.38 – 0.26 0.48 – 0.36 0.78 0.43 0.48 – 0.30 0.43 0.39 0.46 0.46
India – 0.03 – 0.42 0.26 0.13 – 0.02 – 0.10 – 0.48 0.28 0.01 0.02 0.27 0.03 0.28 0.06
Indonesia 0.17 0.30 0.53 0.24 0.57 0.16 0.30 0.52 0.56 0.24 0.58 0.57 0.56 0.56
Italy 0.69 0.07 0.65 0.64 0.76 0.69 0.06 0.64 0.73 0.63 0.67 0.75 0.66 0.71
Japan 0.60 0.64 0.63 0.65 0.84 0.59 0.66 0.62 0.83 0.64 0.63 0.84 0.64 0.83
Mexico 0.16 0.47 0.55 0.18 0.56 0.18 0.25 0.51 0.51 0.17 0.57 0.54 0.51 0.48
Netherlands 0.88 0.24 0.41 0.84 0.48 0.87 0.25 0.39 0.44 0.83 0.40 0.45 0.39 0.41
Saudi Arabia – 0.02 0.44 0.06 0.23 0.48 0.26 0.55 0.55 0.55 0.55
South Africa 0.04 0.22 0.26 0.28 0.04 0.17 0.21 0.19 0.26 0.32 0.26 0.31
South Korea – 0.06 0.07 0.74 0.16 0.53 – 0.32 0.16 0.72 0.45 0.14 0.74 0.55 0.72 0.47
Spain 0.43 0.31 0.59 0.35 0.50 0.43 0.31 0.57 0.46 0.35 0.54 0.46 0.51 0.43
Turkey 0.15 0.37 0.57 0.25 0.53 0.17 0.40 0.56 0.51 0.26 0.58 0.57 0.56 0.55
United Kingdom 0.56 0.58 0.46 0.52 0.43 0.52 0.57 0.45 0.42 0.47 0.48 0.45 0.47 0.44
United States 0.63 0.66 0.76 0.71 0.64 0.64 0.72 0.74 0.69 0.71 0.75 0.61 0.75 0.60
USSR – 0.06a 0.20 0.49b 0.45c 0.39d 0.04a 0.19 0.45b 0.41c 0.37d
a
1928-1940; b1971-1991; c1961-1991; d1928-1991.
Note: The G-20 comprises 20 “major” economies (19 countries, plus the European Union, EU) that together account for 85% of world GDP.
Neither the Netherlands nor Spain are members of this group except through their membership in the EU, but they have been special guests to
some of their meetings; for that reason are included here. Though Russia is a member of the G-20, correlations computed here are for the
USSR.
Figure 1. Dots indicate years in which emissions (total, upper panel; per capita, lower panel)
increased over 4% in countries with more than 20 million population in 2000 (data unavailable for
Bangladesh and Pakistan before 1972, for Germany in 1945-1990, for countries formerly part of the
USSR before 1992, for Afghanistan, Kenya, and Zaire before 1950, and for Malaysia before 1970)

Source: Elaborated by the authors from CDIAC data.

Figure 2. CO2 emissions and GDP, both as annual percentage growth rates, United States, 1920-2002

Source: Elaborated by the authors from CDIAC data for emissions and real GDP data from the
Historical Statistic of the United States (Carter et al., 2006)
Figure 3. Per capita annual emissions of CO2 vs GDP per capita, 1960-2006, G-20 countries
 26
Figure 3 (cont.). Per capita annual emissions of CO2 vs GDP per capita, 1960-2006, except for USA as indicated

Notes and sources: Authors’ elaboration from CO2 emission data from CDIAC and Word Bank GDP data for all countries in the figure
except for the USSR (GDP data from Maddison) and the United States (GDP data from Carter et al.’s Historical Statistics of the
United States). The countries included are those pertaining to the expanded G-20 (see note in table 3). USSR data are for the years
before the USSR disappeared, i. e., until 1991.
Figure 4. Decadal correlations between growth in CO2 emissions and GDP growth in four
countries, in the period 1875-2002. Decades starting in the year indicated on the horizontal axis

Source: Authors’ elaboration from CDIAC emission data and Maddison data on GDP
 28
Figure 5. Population, CO2 emissions and GDP per capita of the world economy
 Figure 6. Global GDP and world CO2 emissions, both as annual percentage growth rates

Source: Elaborated by the authors from World Bank and CDIAC data.

Figure 7. Corporate profits and CO2 emissions in the United States (both series in annual
growth rate, %). Note the strong drop in both profits and CO2 in major recessions such as those
occurring in 1938, 1949, and 1980.

Source: Elaborated by the authors from CDIAC emissions and NIPA data on corporate profits.
 30

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