Int. J. Green Economics, Vol. 11, No.

2, 2017 83

Relationship between CO2 emissions and GDP

functional form and decoupling

Mariana Conte Grand* and

Vanesa V. D’Elia
Department of Economics,
Universidad del CEMA
Av. Córdoba 374, Buenos Aires (C1054AAP), Argentina
Email: mcg@cema.edu.ar
Email: vvd04@cema.edu.ar
*Corresponding author

Abstract: The aim of this paper is to study the relationship between

Emissions-GDP functional form and decoupling behaviour in developed and
developing countries. With data for the period 1960–2012 for 27 European
countries and 18 CELAC nations, this research employs a Box-Cox
specification to capture the CO2 emissions-GDP connection, considering, at the
same time, the time-series properties of both variables. We find that the Box-
Cox functional form describes better the relationship between income and
pollution in UE and CELAC countries, but there are differences regarding
decoupling behaviour. Many European countries have increased economic
activity while decreasing emissions, but that behaviour is not observed among
CELAC nations. Except when delinking between CO2 and GDP is strong, this
mismatch between functional form and decoupling is explained because the
type of decoupling depends on both the slope of the relationship between
emissions and GDP and on the level of both indicators.

Keywords: decoupling indicators; non-linear regression; Box-Cox

transformation; CELAC; EU.

Reference to this paper should be made as follows: Conte Grand, M. and

D’Elia, V.V. (2017) ‘Relationship between CO2 emissions and GDP functional
form and decoupling’, Int. J. Green Economics, Vol. 11, No. 2, pp.83–106.

Biographical notes: Mariana Conte Grand holds a PhD in Economics

(UCLA). She has been a professor at several universities in Argentina and
visiting scholar at the University of Washington in Seattle and UCLA. She
directed during several years the Economics Department (and its Master
Program) at Universidad del CEMA, where she teaches Advanced
Microeconomics and Environmental Economics courses. She has received
numerous fellowships from Fulbright, the U.C. Institute on Global Conflict and
Cooperation, the Inter American Institute for Global Change, among others.
She has publications mainly related to international environmental agreements.
She was a lead author of the last IPCC Report.

Vanesa V. D’Elia holds a BA in Economics (Universidad Nacional de

Rosario), a Master in Economics and a PhD degree in Economics (Universidad
del CEMA). Her areas of expertise are Social Protection and Environmental
Economics and she has several publications on these issues. She has worked as
an advisor of the Minister of Economy, participating as an Argentine delegate
in international negotiations regarding climate change in the UN and in the

Copyright © 2017 Inderscience Enterprises Ltd.

84 M. Conte Grand and V.V. D’Elia

G20 group. In 2011 she was a member of the Transitional Committee for the
Design of the Green Climate Fund.

This paper is a revised and expanded version of a paper entitled ‘Using the
Box-Cox transformation to approximate the shape of the relationship between
CO2 emissions and GDP: A note’ presented at the ‘XLVIII Reunión Anual de la
Asociación Argentina de Economía Política’, Rosario, Argentina, Nov. 2013.

1 Introduction

The international community agrees that, in order to avoid catastrophic damages due to
climate change, the average increase of global temperature should be kept below 2°C
with respect to pre-industrial levels. The Paris Agreement (Article 2) goes even further
and states that countries should pursue efforts to limit the temperature increase to
1.5 degrees. Several research groups have analysed the gap between present emissions
levels and those needed to honour the 2°C goal (e.g., UNEP, 2010; den Elzen and Höhne,
2008; Levin and Bradley, 2010). These analyses suggest that the gap is substantial;
closing it will require greenhouse gases (GHG) emissions reductions of over 45% to 70%
by 2050 compared to 2010 (IPCC, 2014).
Countries seem to understand the threats of climate change more clearly now than in
the past. But, even if the Durban Platform in 2015 asked for all countries to engage in
actions to alleviate climate change, the division between developed and developing
countries remains. Developing countries historically argued that they have the right to
increase emissions in order to meet their needs since they are not responsible for the
GHG concentration levels that resulted from developed countries’ economic growth. In
that context, the analysis of the relationship between emissions and the Gross Domestic
Product (GDP) plays an important role.
Indeed, a large body of literature emerged around the beginning of the 1990s under
the name of “Environmental Kuznets curve” (EKC). The idea behind the EKC is that
starting from low per capita income levels, emissions per capita tends to increase at a
lower rate up to a “turning point”, where those emissions begin to decrease as income per
capita continues to evolve. This reduction is attributed to changes in people’s tastes as
well as technological shifts (Grossman and Krueger, 1995). Two of the main problems
pointed out by the critics of the EKC are: time-series properties associated to the data
(ordinary least squares regression assumes that all the variables are stationary, so if they
are not, further scrutiny is needed) and the functional form used to estimate the
relationship between emissions and GDP (standard EKC estimation assumes linear,
quadratic or cubic patterns). To address the first concern, articles began to deal with the
fact that environmental degradation and income could be non-stationary, therefore, the
EKC regressions could be spurious, unless the two series were cointegrated. Perman and
Stern (2003) in particular, focusing on sulphur emissions and GDP for 74 countries along
31 years (from 1960 to 1990) found that, for many of the countries, emissions per capita
or GDP are non-stationary series and a long-run cointegrating relationship between those
variables only exists in 35 of them, which implies that the EKC cannot be estimated for
the remaining countries or for the panel as a whole. Similarly, Wang (2013) tests
the EKC for SO2 and CO2 emissions from 1850 to 1990 for several nations individually
 Relationship between CO2 emissions and GDP functional form 85

(and within a panel) and finds that none of the EKC he estimates for single countries is a
cointegrated equation. With respect to the second issue, several articles have provided
alternative formulations to the usual functional form specification. Wang (2013) uses
different exponentials for income and Vollebergh et al. (2009) draw on semi parametric
specifications of the B-spline function, for example.
Simultaneously, the link between emissions and GDP has also become important to
evaluate the advantages of intensity reduction targets. In general, the emission reduction
metrics in international negotiation have been of the following types: fixed reductions
with respect to the past, absolute reductions with respect to the future business as usual
(BAU) emissions, and intensity caps with baselines in the past. Intensity caps, contrary to
fixed caps, do not set a country’s allowable emissions level, but determine their amount
as a linear function of GDP. Hence, they fix carbon intensity (Emissions/GDP).1 The idea
behind setting a target related to carbon intensity is allegedly to guarantee “emissions’
decoupling”.
The Organization for Economic Cooperation and Development states that decoupling
refers to breaking the link between “environmental bads” and “economic goods” (OECD,
2002; UNEP, 2011). Usually decoupling is seen as a positive concept, but there are
different degrees of decoupling and not all of them involve a reduction in emissions
(what is needed to mitigate climate change). Three indicators have been employed to
quantitatively assess decoupling. One is the decoupling factor introduced in OECD
(2002) that is grounded on the rate of growth of emissions intensity. The second is the
indicator introduced in Tapio (2005), which is basically an emissions to economic
activity elasticity. The third measurement was presented by Lu et al. (2011), and
considers, in addition to GDP growth, emissions intensity growth. Here, Tapio’s (2005)
definition is used since it is the most usual in the literature (see Conte Grand, 2016 for a
comparison of the three indicators).
The main innovation of this paper is to study the relationship between the Emissions-
GDP functional form and the different cases of decoupling. The second novelty is that it
employs the Box-Cox specification to capture the CO2 emissions-GDP link, taking
into consideration the time-series properties of both (transformed) variables for
each individual country. The advantage of this formulation is the use of a nonlinear
transformation of variables that subsumes several other functional forms as nested cases
(for example, both the linear model and log-log model). We find that, if the slope of the
functional form is negative (independently of its shape), the country would be
undertaking a strong decoupling. But, if that slope is positive, the decoupling behaviour
depends on the shape of the relationship between emissions and GDP and on the level of
both environmental and economic indicators. This explains why, even if the Box-Cox
functional form predominates when analysing the relationship between income and
pollution in each country, and there is a similar preponderance of that shape in EU and in
CELAC, the decoupling behaviour is quite different among these two groups of countries.
This paper is organised as follows. Section 1 describes the empirical strategy and
mentions the data sources. Section 2 shows our results. Section 3 discusses the link
between Emissions-GDP functional form and the different cases of decoupling, and
Section 4 concludes.
86 M. Conte Grand and V.V. D’Elia

2 Empirical strategy and data

2.1 Functional form

Wang (2013) shows the functional sensitivity of the EKC transforming GDP using
different powers (from 0 that is the specific case of a linear function to 2 that is the case
of a quadratic function) and states that its approach is an alternative to a Box-Cox (1964)
transformation (Wang, 2013, see footnote 3). Indeed, the functional relationship that may
exist between emissions and GDP can be derived with more precision applying the Box-
Cox transformation technique (Box-Cox, 1964). In this study, the specification for the
emission model is the following:
Et      GDPt   ut (1)
Et  1 GDPt   1
where Et  and GDPt   if  ,   0 , respectively and
 
Et = log( Et ) if   0 , GDPt  = log( GDPt ) if   0 ,
where Et are emissions at time t, GDPt is the gross domestic product at time t,  and 
are the parameters of the Box-Cox functional form, α and β are the coefficients of the
regression and ut is the error term.
The estimated parameters α, β, θ and λ are obtained with the maximum likelihood
method using STATA 13.
The Box-Cox transformation is then compared with other functional forms: the linear
model (θ=λ=1), the log-lin model (θ=0, λ=1) and the log-log model (θ=λ=0). That
comparison is performed using Likelihood Ratio tests based on the log-likelihood
estimates for the unrestricted (Box-Cox) versus the restricted (linear, log-log, or log-lin)
models (Greene, 2011). A high calculated chi-distribution (χ2) statistics implies rejection
of the null hypothesis that the restrictions to the functional form are correct. More
specifically, the test used here is:
LRT  2   lnL*  lnL  ~ χ 2J (2)

where lnL* is the log likelihood evaluated at the restricted estimates, lnL is the log-
likelihood evaluated at the unrestricted Box-Cox estimates, and J are the number of
restricted parameters.2
Once the functional form that best fits emissions and GDP data of each country is
selected, it is crucial to test for time-series properties of the (transformed) variables used
in the regression.3 One of the most popular tests of stationarity is the Dickey-Fuller (DF)
test. However, this test assumes that the error terms are uncorrelated. When the residuals
are serially correlated, the Augmented Dickey-Fuller (ADF) test proposes to include
in the regression several lags of the dependent variable ΔYt to eliminate the serial
correlation. In this paper we perform the modified Dickey-Fuller t test (known as the
DF-GLS test) proposed by Elliott et al. (1996) to evaluate unit roots. Essentially, the test
is similar to an ADF except that the time series is transformed via a generalised least
squares regression. Elliott et al. (1996) and later studies have shown that this test has
significantly greater power than the previous versions of the ADF (Elliott et al., 1996,
p.813). The testing procedure for the DF-GLS test is the same as for the ADF test and is
applied to the model with constant term and trend. The lag lengths were chosen for each
variable in each of the countries using the procedure suggested by Ng and Perron (1995).
 Relationship between CO2 emissions and GDP functional form 87

Perron (1989) showed that not considering a possible existing break when performing
the ADF test could lead to a bias that reduces the ability to reject a unit root null
hypothesis, and suggested a unit root test that allows for a known exogenous structural
break. But, as the choice of the break point is correlated with the data, we use Zivot and
Andrews (1992) unit root test that allows for a single structural break in the intercept and
the trend of the series.
The conventional cointegration tests mostly used in empirical literature do not take
into account the possibility of structural breaks in the long-run relationship. Nevertheless,
building on Engle-Granger test (1987), Gregory and Hansen (1996a, 1996b) developed a
cointegration test accounting for structural breaks. These authors propose to use the ADF
test and the zα and zt tests developed by Phillips (1987) to test for a unit root on the
residuals but based on models that account for breaks. The single break date on these
models is endogenously determined by estimating the cointegration equations for all
possible break dates in the sample. Appendix A describes each of the time series tests
that were performed to consider valid the regression based on the functional form selected.

2.2 Decoupling indicators

Tapio (2005) introduces a decoupling indicator to analyse the relationship between the
volume of transport and CO2 emissions, that was then extended to delinking of carbon
related emissions from GDP (for example, Wang and Yang, 2015). Concretely, this
decoupling indicator refers to the emissions to economic activity elasticity. More precisely:
e
D  (3)
g

 E  Eo En 
where e is emissions’ growth  e  n   1 and g is the rate of growth of the
 Eo Eo 
 GDPn  GDPo GDPn 
Gross Domestic Product  g    1 .
 GDPo GDPo 
Following Tapio (2005), there are indeed eight “logical possibilities” (or concepts)
depending on the values of Dε (and e and g). Those are reported in Table 1. Coupling
refers to the situation where Dε is close to 1 (that is equivalent to saying e  g). When Dε
departs from 1, there is decoupling. If Dε < 0 strong decoupling occurs (this means that e
and g have opposite signs), if 0 <Dε < 1 decoupling is weak (this implies that e and g
have the same sign), and if Dε > 1, it is just decoupling (and, again e and g have the same
sign since Dε > 0). When both emissions and economy change in the same direction, if
they increase this is called “expansive”, and when both variables decrease, it is
“recessive”. Hence, the denomination “expansive” or “recessive” does not come from the
value of Dε, but from the sign of g. Finally, “negative” has to do with an increase in the
rate of change of emissions’ intensity.4 Table 1 describes each of the possible cases of
decoupling depending on the values taken by the decoupling indicator Dε.
The information we use for our analysis is: 1960–2012 CAIT International data for
emissions (measured in thousands of metric tons of CO2), and GDP (in million constant
2005 dollars) from the World Bank Development Indicators. Following the historical
division between developed and developing countries at the international negotiations on
climate change, we limit our analysis to the 27 countries of the European Union (as a
representation of the developed world)5 and the 18 continental developing countries that
form part of the Community and Latin American and the Caribbean States (CELAC).6
88 M. Conte Grand and V.V. D’Elia

Table 1 Eight “logical cases” for Dε

Emissions’ rate GDP rate

Indicator value* Concepts
of change (e) of change (g)
Dε < 0 e<0 g>0 Strong decoupling
Dε < 0 e>0 g<0 Strong negative decoupling
0 < Dε < 1 e>0 g>0 Weak decoupling
0 < Dε < 1 e<0 g<0 Weak negative decoupling
Dε = 1 e>0 g>0 Expansive coupling
Dε = 1 e<0 g<0 Recessive coupling
Dε > 1 e<0 g<0 Recessive decoupling
Dε > 1 e>0 g>0 Expansive negative decoupling
Source: Own elaboration based on Tapio (2005, p.139).
Note: *The limiting values for Ds take into account a ±20% variation around 1, “not
to overinterpret slight changes as significant”.

3 Results

Regarding the empirical relationship between CO2 emissions and GDP, the Log-
likelihood Ratio test reported in Table 2 indicates that the Box-Cox functional form
provides the best adjustment for the majority of both developed and developing
countries. The Box-Cox shape is preferred in 14 of the 27 EU countries and in 15 of the
18 CELAC nations. The log-log and log-lin shapes have almost the same preponderance,
while the linear model holds only for UK.7
With respect to the stationarity of the series, Table 3 shows the commonly calculated
DF-GLS statistics using lag=0, the DF-GLS statistics using the optimum lag, and the
Zivot and Andrews statistics for the transformed emissions and GDP for each country.8
As can be seen in Table 3, the emissions and GDP series are both stationary (with breaks)
in levels for Estonia, Italy, Latvia and Brazil. However, the series for Cyprus, Malta,
Netherlands, Poland, Slovenia, Belize, Colombia, Ecuador, El Salvador, Guatemala,
Honduras, Mexico, Nicaragua and Peru are integrated of different order. Hence, the
model estimated for each of these nations is not valid and they have to be excluded from
the analysis of the functional form.
Table 2 Functional form tests with respect to the Box-Cox transformation
2
Country Calculated χ of Log‐likelihood Ratio Test
Linear Log‐Log Log‐lin Fn. Form
European Union
Aus tri a 34.64 *** 23.53 *** 34.41 *** Box Cox
Belgium 12.16 *** 9.6 *** 0.4 Log‐lin
Bulgaria D1991 6.52 ** 14.81 *** 12.38 *** Box Cox
Cyprus 15.65 *** 1.65 19.65 *** Log‐Log
Czech Republ i c 1.77 1.31 1.04 Log‐Log
Denma rk 19.68 *** 23.86 *** 13.79 *** Box Cox
Es toni a 4.25 ** 4.9 ** 0.1 Log‐l i n
Fi nl a nd 71.38 *** 82.3 *** 50.73 *** Box Cox
*** *** li
 Relationship between CO2 emissions and GDP functional form 89

Table 2 Functional form tests with respect to the Box-Cox transformation (continued)
2
Country Calculated χ of Log‐likelihood Ratio Test
Linear Log‐Log Log‐lin Fn. Form
France 11.69 *** 9.49 *** 0.06 Log‐lin
Germany 19.43 *** 35.43 *** 0.63 Log‐l i n
Greece 34.42 *** 15.74 *** 57.26 *** Box Cox
Hungary 3.88 ** 6.19 ** 6.08 ** Box Cox
Irel and 44.51 *** 15.27 *** 6.57 ** Box Cox
Ita l y D1971 and D1981 22.46 *** 17.71 *** 13.74 *** Box Cox
Latvi a D1994 4.16 ** 26.22 *** 21.95 *** Box Cox
Lithuania 2.59 2.58 0.58 Log‐Log
Luxembourg 7.96 *** 1.37 0.02 Log‐Log
Mal ta 13.08 *** 5.88 ** 16.63 *** Box Cox
Netherla nds 36.23 *** 25.06 *** 75.02 *** Box Cox
Pol a nd 6.35 ** 3.63 * 0.1 Log‐l i n
Portugal 55.03 *** 21.1 *** 23.51 *** Box Cox
Romania D1991 2.17 9.26 *** 8.99 *** Box Cox
Sl ova ki a 2.22 2.1 0.35 Log‐Log
Sl oveni a 0.16 0.33 0 Log‐l i n
Spa i n 46.34 *** 33.82 *** 59.67 *** Box Cox
Sweden 1.14 0.89 4.37 ** Log‐Log
Uni ted Ki ngdom 1.03 11.32 *** 3.75 ** Li nea r
CELAC
Argenti na 48.93 *** 36.93 *** 86.93 *** Box Cox
Bel ize D1999 a nd D2001 13.21 *** 43.59 *** 18.44 *** Box Cox
Bol ivi a 10.8 *** 34.62 *** 72.61 *** Box Cox
Bra zil 37.74 *** 4.96 ** 84.52 *** Box Cox
Chi l e 7.35 *** 7.26 *** 56.44 *** Box Cox
Col ombi a 83.19 *** 25.56 *** 36.3 *** Box Cox
Cos ta Ri ca 69.19 *** 40.43 *** 79.77 *** Box Cox
Ecuador 33.53 *** 31.2 *** 112.68 *** Box Cox
El Sal va dor D1979 17.5 *** 5.21 ** 6.37 ** Box Cox
Guatemal a 59.9 *** 21.13 *** 8.74 *** Box Cox
Hondura s 73.93 *** 20.77 *** 22.44 *** Box Cox
Mexi co 27.05 *** 33.26 *** 150.39 *** Box Cox
Ni ca ragua D1979 24.27 *** 3.27 ** 0.21 Log‐l i n
Panama 10.79 *** 1.91 59.6 *** Log‐Log
Para guay 51.32 *** 9.71 *** 36.49 *** Box Cox
Peru 26.93 *** 17.19 *** 82.36 *** Box Cox
Urugua y 8.41 *** 15.41 *** 2.52 Log‐l i n
Venezuel a 12.81 *** 32.71 *** 69.34 *** Box Cox
Notes: *, **, *** denote rejection of the null-hypothesis (the model in each column
against the corresponding Box-Cox functional form) with 10%, 5% and 1%
significance. Before testing the functional form, we inspected graphically the
relationship between CO2 emissions and GDP for each country. The graphs
suggested the presence of structural breaks for Bulgaria, Italy, Latvia,
Romania, Belize, El Salvador and Nicaragua. In each case, the observed
breakpoints (period dummies) were confirmed using the Zivot-Andrews test
(1992). Scripts denote countries whose relationship between emissions and
GDP is not statistically significant.
 90
Model in levels
Dependent variable: Emisions Independent variable: GD
Functional DF‐GLS DF‐GLS Zivot‐Andrews Break DF‐GLS DF‐GLS Zivot‐Andrews
Country Conclusion
Table 3
form Statistic Statistic (lag 0) Statistic time Statistic Statistic (lag Statistic
European Union
Aus tri a Box Cox ‐1.173 ‐1.173 ‐4.002 0 1970 non‐s ta ti ona ry ‐1.701 ‐2.059 ‐3.791 0
Cyprus Log‐Log ‐0.727 ‐0.726 ‐1.99 0 2004 non‐stationary ‐0.112 ‐0.921 ‐4.861 *
Czech Republ i c Log‐Log ‐1.551 ‐1.019 ‐3.977 0 1989 non‐s ta ti ona ry ‐1.882 ‐1.737 ‐2.87 0
Denma rk Box Cox ‐1.867 ‐1.867 ‐3.885 0 1996 non‐s ta ti ona ry ‐2.546 ‐1.753 ‐3.324 0
Es toni a Log‐l i n ‐1.653 ‐0.995 ‐6.242 *** 1996 s ta ti ona ry wi th bre a k ‐2.317 ‐1.552 ‐5.649 ***
Fi nl a nd Box Cox ‐1.186 ‐1.123 ‐3.15 0 2004 non‐s ta ti ona ry ‐2.444 ‐1.902 ‐3.857 0
Germa ny Log‐l i n ‐1.857 ‐1.37 ‐4.666 0 1980 non‐s ta ti ona ry ‐1.984 ‐2.651 ‐4.76 0
Greece Box Cox ‐0.985 ‐0.387 ‐3.559 0 2004 non‐s ta ti ona ry ‐1.234 ‐0.614 ‐3.957 0
Hunga ry Box Cox ‐1.064 ‐1.064 ‐3.671 0 1976 non‐s ta ti ona ry ‐3.489 ‐0.88 ‐4.784 0
Irel a nd Box Cox ‐1.158 ‐0.745 ‐3.628 0 2002 non‐s ta ti ona ry ‐0.781 ‐0.136 ‐3.698 0
Ita l y Box Cox ‐1.363 ‐0.681 ‐6.838 *** 2004 s ta ti ona ry wi th bre a k ‐1.404 ‐1.667 ‐5.744 ***
La tvi a Box Cox ‐1.334 ‐0.994 ‐8.15 *** 1992 s ta ti ona ry wi th bre a k ‐2.483 ‐1.511 ‐5.199 **
Luxembourg Log‐Log ‐1.819 ‐1.819 ‐3.836 0 1979 non‐s ta ti ona ry ‐1.594 ‐1.52 ‐2.889 0
Malta Box Cox ‐1.254 ‐2.318 ‐5.819 *** 1986 stationary with break ‐0.718 ‐0.463 ‐3.239 0
Netherlands Box Cox ‐1.187 ‐1.606 ‐5.334 ** 1970 stationary with break ‐2.461 ‐1.531 ‐3.084 0
Pol a nd Log‐l i n ‐2.806 ** ‐0.841 ‐3.314 0 1975 s ta ti ona ry ‐1.199 ‐2.5 ‐4.1 0
Portuga l Box Cox ‐1.299 ‐0.032 ‐2.958 0 2000 non‐s ta ti ona ry ‐0.867 ‐0.075 ‐3.007 0
Sl ova ki a Log‐Log ‐0.679 ‐0.679 ‐4.632 0 1991 non‐s ta ti ona ry ‐1.783 ‐1.783 ‐3.462 0
M. Conte Grand and V.V. D’Elia

Slovenia Log‐lin ‐2.079 ‐2.079 ‐3.509 0 2007 non‐stationary ‐0.967 ‐0.967 ‐5.152 **
Unit root tests for the series in level

Spa i n Box Cox ‐1.086 ‐0.326 ‐2.533 0 1970 non‐s ta ti ona ry ‐0.615 ‐0.795 ‐3.371 0
Sweden Log‐Log ‐2.236 ‐1.29 ‐3.294 0 1968 non‐s ta ti ona ry ‐1.422 ‐1.407 ‐3.492 0
Uni ted Ki ngdom Li nea r ‐2.716 ‐2.716 ‐4.18 0 2003 non‐s ta ti ona ry ‐1.729 ‐1.419 ‐3.751 0
CELAC
Argenti na Box Cox ‐1.797 ‐1.797 ‐3.564 0 1969 non‐s ta ti ona ry ‐1.935 ‐1.935 ‐3.359 0
Belize Box Cox ‐4.024 *** ‐3.492 ** ‐5.122 ** 1999 stationary ‐2.826 ‐1.736 ‐4.103 0
Bol i vi a Box Cox ‐1.988 ‐1.682 ‐3.656 0 1999 non‐s ta ti ona ry ‐1.448 ‐1.468 ‐4.559 0
Bra zi l Box Cox ‐1.201 ‐0.818 ‐5.804 *** 1973 s ta ti ona ry wi th bre a k ‐1.003 ‐0.531 ‐4.989 *
Chi l e Box Cox ‐1.678 ‐1.135 ‐4.021 0 1988 non‐s ta ti ona ry ‐1.204 ‐0.401 ‐4.823 0
Colombia Box Cox ‐0.53 ‐0.938 ‐3.826 ** 1999 stationary with break ‐1.733 ‐0.344 ‐3.498 0
Cos ta Ri ca Box Cox ‐1.192 ‐1.192 ‐3.371 0 1980 non‐s ta ti ona ry ‐1.046 ‐0.691 ‐3.749 0
Ecuador Box Cox ‐1.636 ‐1.087 ‐4.736 0 1974 non‐stationary ‐1.884 ‐0.836 ‐5.257 **
El Salvador Box Cox ‐2.56 ‐1.828 ‐2.921 0 1991 non‐stationary ‐2.818 * ‐1.317 ‐5.257 **
Guatemala Box Cox ‐2.014 ‐1.733 ‐3.676 0 1981 non‐stationary ‐1.552 ‐0.943 ‐4.941 *
Honduras Box Cox ‐2.948 ** ‐2.656 ‐3.676 0 1981 stationary ‐2.272 ‐2.003 ‐4.09 0
Mexico Box Cox ‐2.523 ‐2.523 ‐4.036 0 1978 non‐stationary ‐1.994 ‐2.47 ‐4.956 *
Nicaragua Log‐lin ‐2.175 ‐2.064 ‐5.674 *** 1979 stationary with break ‐2.435 ‐2.139 ‐3.091 0
Pa na ma Log‐Log ‐1.878 ‐1.766 ‐3.44 0 1984 non‐s ta ti ona ry ‐1.662 ‐1.095 ‐3.051 0
Pa ra gua y Box Cox ‐1.001 ‐1.917 ‐4.311 0 1993 non‐s ta ti ona ry ‐1.098 ‐0.702 ‐3.636 0
Peru Box Cox ‐1.443 ‐1.636 ‐3.897 0 1983 non‐stationary ‐1.639 ‐1.443 ‐5.49 **
Urugua y Log‐l i n ‐1.78 ‐1.986 ‐4.186 0 1982 non‐s ta ti ona ry ‐0.905 ‐0.155 ‐3.923 0
Venezuel a Box Cox ‐2.9 ‐3.108 ‐4.349 0 1999 non‐s ta ti ona ry ‐2.379 ‐2.008 ‐4.005 0
Notes: The Zivot and Andrews tests allows for a single structural break in both the intercept and in the trend of the series. The lags
in Zivot Andrews unit root test were chosen via t-test. The countries with series integrated of different orders are
highlighted in italics.
*, **, *** denote 10%, 5% and 1% of significance.
 Relationship between CO2 emissions and GDP functional form 91

Table 4 confirms that, except for Hungary and Spain, the series for the rest of the
countries are integrated of order 1, I(1), validating the long-run cointegration possibility
between emissions and GDP. But, when allowing for breaks for the series of Hungary
and Spain, the Zivot and Andrews test shows that these nations are also I(1).9 Tables B1
and B2 of Appendix B show the Gregory-Hansen cointegration test that accounts for one
endogenous break. In the case of developed countries, this cointegration test gives
evidence that there is a cointegration relationship between emissions and GDP for Czech
Republic, Denmark, Germany, Greece, Hungary, Ireland, Portugal and Slovakia. For
developing countries, cointegration evidence was found for Argentina, Chile, Costa Rica,
Panama, Paraguay, Uruguay and Venezuela. The ADF and/or the zt tests reject the null
hypothesis of no cointegration for at least one model for the latter nations.
Table 4 Unit root tests for the series in first difference

Model in first difference

Dependent variable: Delta Emisions Dependent variable: Delta GDP
Functional DF‐GLS DF‐GLS DF‐GLS DF‐GLS
Country
form Statistic Statistic (lag 0) Statistic Statistic (lag 0)
European Union
Aus tri a Box Cox ‐6.691 *** ‐6.691 ** ‐2.328 ‐6.42 ***
Czech Republ i c Log‐Log ‐1.217 ‐5.467 ** ‐3.419 * ‐3.419 *
Denma rk Box Cox ‐4.79 *** ‐8.84 ** ‐5.706 *** ‐5.706 ***
Fi nl a nd Box Cox ‐2.233 ‐7.945 ** ‐2.435 * ‐5.151 ***
Germa ny Log‐l i n ‐0.825 ‐7.555 ** ‐5.434 *** ‐2.651
Greece Box Cox ‐1.902 ‐7.271 ** ‐1.215 ‐4.171 ***
Hungary Box Cox ‐6.584 *** ‐6.584 ** ‐3.029 ‐3.029
Irel a nd Box Cox ‐0.647 ‐6.46 ** ‐2.057 ‐4.73 ***
Luxembourg Log‐Log ‐5.806 *** ‐5.806 ** ‐5.666 *** ‐5.666 ***
Portuga l Box Cox ‐1.599 ‐6.883 ** ‐2.58 ‐6.205 ***
Sl ova ki a Log‐Log ‐6.702 *** ‐6.702 ** ‐3.36 * ‐3.36 *
Spain Box Cox ‐2.68 * ‐6.367 ** ‐1.408 ‐2.268
Sweden Log‐Log ‐5.541 *** ‐5.541 ** ‐5.541 *** ‐5.541 ***
Uni ted Ki ngdom Li nea r ‐8.794 *** ‐8.794 ** ‐4.966 *** ‐4.966 ***
CELAC
Argenti na Box Cox ‐6.283 *** ‐6.283 ** ‐6.16 *** ‐6.16 ***
Bol i vi a Box Cox ‐5.798 *** ‐5.798 ** ‐3.444 ** ‐5.432 ***
Chi l e Box Cox ‐5.698 *** ‐5.698 ** ‐5.224 *** ‐5.224 ***
Cos ta Ri ca Box Cox ‐2.525 * ‐6.246 ** ‐3.992 *** ‐3.992 ***
Pa na ma Log‐Log ‐2.194 ‐7.295 ** ‐4.087 *** ‐4.087 ***
Pa ra gua y Box Cox ‐4.131 *** ‐8.265 ** ‐5.109 *** ‐5.109 ***
Urugua y Log‐l i n ‐2.579 * ‐6.823 ** ‐3.423 ** ‐4.007 ***
Venezuel a Box Cox ‐1.513 ‐7.947 ** ‐5.801 *** ‐5.801 ***
Note: *, **, *** denote 10%, 5% and 1% of significance.
Then, the first finding is that the Box-Cox functional form predominates when analysing
the relationship between income and pollution in each country, and there is a similar
preponderance of that shape in EU and in CELAC. More precisely, 13 of the 19 countries
that present a non-spurious relationship (11 EU countries + 8 CELAC countries) follow a
Box-Cox functional specification. In the case of the EU nations, 7 out of 11 countries
(64%) present a Box-Cox relationship between income and emissions, while for 6 out of
8 CELAC countries (75%) the Box-Cox shape is more appropriate than other traditional
shapes generally used in empirical studies (i.e. linear, log-log, quadratic, etc.).
92 M. Conte Grand and V.V. D’Elia

Nevertheless, even if functional forms do not differ substantially among groups of

countries, decoupling is not the same in European and Latin American nations and that
can be seen when analysing the corresponding indicator. On one hand, Table 5 shows
that half of CELAC countries have gone through a weak decoupling (GDP and emissions
increase, while emissions intensity decreases) from 1960 to the present, whereas the
remaining nations performed an expansive negative decoupling (income, GHG and
emissions intensity have all increased). On the other hand, among EU countries, slightly
less than half of the countries undertook a weak decoupling process, a few have
undergone expansive negative decoupling, but there are also several cases of strong
decoupling (GDP is higher, but emissions and emissions intensity are lower).
Table 5 Functional form and decoupling behaviour by countries
Country Fn. Form   β CO2 avg. GDP avg. e g t DƐ Decoupling case
European Union
Czech Republic Log‐log ‐0.24 124,191 122,484 ‐0.28 0.45 ‐0.50 ‐0.62 strong decoupling
Denmark Box‐Cox 1.68 ‐1.92 1.60E+17 53,929 181,473 0.28 2.38 ‐0.62 0.12 weak decoupling
Estonia Log‐lin 1.26E‐05 16,598 12,089 0.01 1.18 ‐0.54 0.01 weak decoupling
Germany Log‐lin ‐1.91E‐07 937,904 2,289,247 ‐0.25 1.29 ‐0.67 ‐0.19 strong decoupling
Greece Box‐Cox ‐0.41 ‐0.78 180.95 81,400 192,302 7.99 3.66 0.93 2.19 expansive negative decoupling
Hungary Box‐Cox 4.56 ‐0.71 ‐4.27E+24 64,627 96,319 ‐0.31 0.43 ‐0.52 ‐0.72 strong decoupling
Ireland Box‐Cox ‐0.86 ‐0.86 1.03 35,864 133,373 0.90 4.88 ‐0.68 0.18 weak decoupling
Portugal Box‐Cox ‐0.57 ‐0.28 0.09 35,890 123,409 5.39 4.86 0.09 1.11 expansive negative decoupling
Slovakia Log‐log ‐0.26 43,563 57,573 ‐0.28 1.28 ‐0.69 ‐0.22 strong decoupling
CELAC
Argentina Box‐Cox ‐0.08 ‐0.66 1077.17 111,709 160,636 3.01 3.18 ‐0.04 0.95 weak decoupling
Brazil Box‐Cox ‐0.32 ‐0.28 0.85 211,977 556,935 9.31 7.75 0.18 1.20 expansive negative decoupling
Chile Box‐Cox 0.44 0.51 0.31 34,576 64,286 5.70 7.69 ‐0.23 0.74 weak decoupling
Costa Rica Box‐Cox ‐0.10 ‐0.45 28.89 3,377 10,836 12.75 10.18 0.23 1.25 expansive negative decoupling
Panama Log‐log 0.90 4,043 9,320 8.91 12.27 ‐0.25 0.73 weak decoupling
Paraguay Box‐Cox ‐0.08 0.14 0.21 2,208 5,362 15.64 9.58 0.57 1.63 expansive negative decoupling
Uruguay Log‐lin 2.910E‐05 5,372 13,165 0.94 2.18 ‐0.39 0.43 weak decoupling
Venezuela Box‐Cox 0.82 0.25 1043.43 101,517 106,206 7.21 3.27 0.92 2.21 expansive negative decoupling

Note: he simplify the presentation, Italy and Latvia were not included in the Table
since they present different parameters according to the sections of the
function. These values are available upon request.
Hence, the second finding is that there is not an obvious link between the shape of the
Emissions-GDP relationship and decoupling. In other words, empirically, a given
functional form does not imply a given decoupling behaviour, as is clear in Table 5. Any
of the functional forms is compatible with several of the decoupling cases.

4 Discussion of the results

However, there is some relationship between the Emissions to GDP equation and the
value of the decoupling indicator. Taking the Box-Cox shape as the more general
functional form (equation 1), emissions depend on income as follows:
1
   
E        GDP   1  1 (4)
  
 Relationship between CO2 emissions and GDP functional form 93

Then, the slope of the emissions’ function is:

E
    E1  GDP  1   0 , depending on   0 (5)
GDP
And, the curvature of the function is given by:
2 E
   2  1     E1 2  GDP 2  2         1  E1  GDP   2  (6)
GDP 2 
Hence, when the function is linear (θ=λ=1), it follows that the slope is  and the second
derivative is 0, for the log-lin model (θ=0, λ=1) the slope of the function expressed in
terms of the original emission variable is   E and the second derivative is always
positive since it is  2  E (so, the function is convex) and, for the log-log functional form
E
(θ=λ=0), the slope of the emissions’ function is   and the curvature is
GDP
E
     1  .
GDP 2
e
At the same time, the different types of decoupling depend on the value of D  .
g
Since D is the emissions-to-GDP elasticity, it can be written as:

E GDP GDP
D       E1  GDP  1      E   GDP  (7)
GDP E E
Then, when   0 , for any value of θ and λ (and so, for any functional form), decoupling
is strong because D is always <0. When   0 , it is necessary to check if the
indicator is greater, equal or lower than 1 in order to define which decoupling case is
prevalent (weak or expansive negative decoupling), and that will depend on
E 10
 . This is confirmed empirically in Table 5.
GDP 
More specifically, as can be seen in Figure 1 and Table 5, only four countries present
a negative relationship between emissions and GDP (i.e. β < 0 in equations 5): Czech
Republic, Germany, Hungary and Slovakia. As shown in equation (7), a negative link
between those two variables implies that all these nations are on a strong decoupling
course ( D  0) , sustaining economic growth without having a negative impact on
environmental conditions. However, that occurs despite of the fact that the shape of the
relationship between those two variables differs among these countries (varying from
log-log for Slovakia to log-lin for Germany or Box-Cox for Hungary). In fact, while from
Figure C1 of Appendix C a reduction of CO2 emissions with growing GDP over the
period 1960–2012 can be verified for all four nations, from Figure 1, the empirical
relationship between pollution and income presents different shapes. Hence, there is no
direct link between the functional form that relates emissions and income and the
decoupling behaviour, except that a negative slope between those two variables (E and
GDP) is a precursor of strong decoupling.
94 M. Conte Grand and V.V. D’Elia

Figure 1 Relationship between emissions and GDP: functional forms by country

Czech Republic Denmark Estonia

200000

100000

40000
100000

50000

20000
0

0
80000 100000 120000 140000 160000 100000 150000 200000 250000 300000 8000 10000 12000 14000 16000
Total CO2 Emissions (MtCO2)

Germany Greece Hungary

200000

100000
500000 1.0e+06

50000
0

0
1.5e+06 2.0e+06 2.5e+06 3.0e+06 50000 100000 150000 200000 250000 70000 80000 90000 100000 110000 120000

Ireland Portugal Slovakia

100000

100000
50000
0

50000 100000 150000 200000 250000 50000 100000 150000 200000 40000 50000 60000 70000 80000

GDP (Million US$, 2005)

(a) European Union

Argentina Brazil Chile

200000

500000

100000
50000
0

100000 200000 300000 0 500000 1.0e+06 0 100000 200000

Total CO2 Emissions (MtCO2)

Costa Rica Panama Paraguay

10000

2000 4000 6000

10000
5000

5000
0

0 10000 20000 30000

0 10000 20000 30000 0 5000 10000

Uruguay Venezuela
10000

100000 200000
5000

0
0

10000 15000 20000 25000 50000 100000 150000 200000

GDP(Million US$, 2005)

(b) CELAC

Note: The dots indicate the observed values and the lines are the fitted values.
 Relationship between CO2 emissions and GDP functional form 95

The rest of the countries present a positive relationship between emissions and GDP
(i.e.   0 ), however, as shown in Table 5, the type of decoupling is different and so is
the functional form that links emissions with income. Denmark, Estonia, Ireland,
Argentina, Chile, Panama and Uruguay are the seven countries that according to Table 5
have decoupled weakly, meaning that these economies grew without corresponding
increases in environmental pressure. As can be seen in Figure C1 of Appendix C,
emissions and GDP rise in these countries but emissions’ intensity diminishes
(i.e. pollution increases at a lower rate than the increase in income). But, as Table 5
illustrates, the remaining six nations (Greece, Portugal, Brazil, Costa Rica, Paraguay and
Venezuela) also show a positive link between emissions and GDP, but all of them
undergo expansive negative decoupling (their emissions increase more than GDP).
Hence, a positive sign for the relationship between emissions and GDP is not a sufficient
marker of the decoupling performance.
In addition, even if those 13 (7 + 6) nations grew while increasing emissions, the
empirical relationship between those variables also takes different functional forms. For
example, as shown in Table 5, that form is Box-Cox for Denmark or Argentina or Chile,
log-log for Panama, or log-lin for Estonia. Therefore, although the environmental
behaviour consists in growing while emissions increase for all of these nations, the
functional form that relates emissions and product differs among them. Figure C1 of
Appendix C shows that in all cases, both CO2 emissions and GDP increase, however, as
Figure 1 illustrates, those two variables move together depicting different shapes.
Therefore, a positive link between emissions and GDP is compatible with differing
functional forms of the relationship between emissions and GDP and different
decoupling behaviours, and so looking at the functional form is not enough to derive
conclusions from countries’ behaviour towards the environment when CO2 and GDP
move in the same direction. In such a case, more analysis is needed.

5 Conclusions

Using CAIT WRI and World Bank data from 1960 to 2012, this article studies the shape
of the long run relationship between CO2 emissions and GDP, and its link with
emissions’ decoupling in selected European and Latin American countries. The first
contribution of this research is that it studies the link between the functional form and the
type of decoupling. The second innovation of this paper is that it applies the Box-Cox
transformation technique to capture the functional form that best fits the data. The
analysis takes into consideration the time-series properties to avoid working with
spurious regressions.
We find that the Box-Cox transformation best fit the data than more traditional
functional forms such us the linear and log-log models in both developed and developing
nations. In this sense, the EU and CELAC countries do not present many differences
regarding the functional form that relates pollution and income (in 64% of EU and 75%
of CELAC countries the best shape is Box-Cox). However, these two regions differ
regarding the type of emissions’ decoupling. More specifically, 44% of EU nations
undergo strong decoupling (meaning that the economy expands while emissions and
emissions’ intensity decrease), but we could not find any strong decoupling case among
CELAC countries. The strong decoupling cases correspond to different functional forms
96 M. Conte Grand and V.V. D’Elia

(log-log, log-lin and Box-Cox models). Then, there is not any evident empirical link
between the shape of the relationship and the type of decoupling.
Nevertheless, it is possible to verify some mathematical relationships between the
parameters of the emissions/GDP function and the type of decoupling. In particular, that
a negative sign for any of the functional forms that link CO2 emissions and GDP implies
a strong decoupling behaviour. However, if that sign is positive, strong decoupling does
not apply, but the rest of the decoupling cases can occur, and which one happens depends
on the parameter of the functional form and the level of emissions and GDP of the
country.
In summary, the Box-Cox transformation is a more appropriate specification for the
majority of the EU and CELAC nations. Although the shape of the relationship between
emissions and income is an important instrument to characterise nations’ environmental
behaviour, it is not sufficient to make an accurate diagnostic of the emissions’ decoupling
performance. Developed countries present better indicators than the developing world in
the sense of decoupling greenhouse gases generation and economy activities while
reducing emissions at the same time, but that cannot immediately be captured by the
functional form that shows how emissions relate to GDP.

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Notes
1 The advantages and disadvantages of different emissions caps are reviewed in Conte Grand
(2013) and have been the subject of several papers.
2 The Box-Cox method begins by computing the maximum likelihood estimation (MLE) score
when the parameters θ = λ = 1. Then, other values for the parameters are tried and, at the end,
the method reports the values of θ and λ that maximises the MLE score.
3 Performing regressions assumes stationary time series. This means that the series exhibits a
mean and a variance that is constant over time. If the variables are non-stationary they can
separate from each other over time and lose their joint relationship. In this case, the regression
would be spurious, meaning that it is their dependence to time that relates the series (Granger
and Newbold, 1974). If the series are non-stationary, but their time differences are stationary
of the same order and cointegrated, i.e. the variables include the same unit root or stochastic
trend, they have a joint component and then, the estimation of the model is valid (Greene,
2011). Cointegration can be interpreted as a sort of long run equilibrium.
4 There is a relationship between emissions, GDP, and emissions intensity rates of changes
 E 
(e, g and t). In fact, emissions at a moment n can be described as: En  GDPn   n  .Then,
 GDPn 
assuming GDP rate of change is g and emissions’ intensity rate of change is t, the equation
 E 
can be written as: En  GDPo  1  g   o   1  t  . Hence, emissions’ rate of change can
 GDPo 
 E 
GDPo  1  g   o   1  t 
E  Eo En  GDPo 
be deduced from: e  n  1   1 . Simplifying
Eo Eo  E 
GDPo   o 
 GDPo 
numerator and denominator, the rate of change in emissions intensity (t) becomes:
g  t  g t
1  g   1  t   1  g  t  g  t , D  .
g
5 Croatia is the EU member state number 28, but this nation is not considered in the paper
because it accessed to the Union in July 2013.
6 The CELAC region consists of 33 sovereign Latin American and Caribbean nations.
According to World Bank data, the 18 continental countries chosen represent more than 95%
of the total GDP of the region, they cover 97% of the extension and include 94% of total
CELAC population, so they can be considered a good representation of the whole region.
7 For those cases where the LR tests are not significant in more than one model (e.g., Czech
Republic, Lithuania, Luxembourg, etc.) we compare the log-likelihood values to select the
model that fits best to the data.
 Relationship between CO2 emissions and GDP functional form 99

8 Belgium, Bulgaria, France, Lithuania and Romania are excluded from Table 3 because, for
those countries, the relationship between emissions and GDP is not statistically significant.
9 More specifically, using a model that allows a break in the tendency, the Zivot and Andrews
calculated t statistics for the first difference of the GDP series for Hungary is –4.251
(the critical value at 10% is –4.11). In the case of Spain, when allowing a structural break in
the intercept and the trend of the series, the test t statistics for the first difference of the GDP
series is –4.842 (the critical value at 10% is –4.82).
10 In a general context, the type of decoupling is defined by the relationship between  and
E
together with the sign of the emissions growth rate (e), the economy growth rate (g)
GDP 
E
and the emissions’ intensity growth rate (t). For example, if   0 and   , then
GDP 
D  1 and, the type of decoupling is expansive negative if e  0 , g  0 and t  0 , but the
emissions’ decoupling is recessive if e  0 , g  0 and t  0 .
11 This criterion starts with a maximum lag length as selected by Schwert (1989) and test the
highest lag coefficient for significance. When the p-value of that lag falls below 0.1, the lag is
retained and is chosen as the optimal lag.
12 Zivot and Andrews (1992) also uses equations that allows for either a break in the intercept
(called model A in their paper) or a break in the tendency (model B).
13 Engle-Granger “residual approach” implies running a regression of Yt against X t (where
both variables have the same order of integration) and extracting the residuals. Then, if the
estimated residuals have a unit root (or, which is the same, are non-stationary), then
cointegration is rejected. If residuals are I(0), cointegration cannot be rejected.
14 Phillips (1987) and Phillips and Perron (1988) correct for any serial correlation and
heteroskedasticity in the errors of equation (A1) non-parametrically by modifying the Dickey
Fuller test statistics. Phillips and Perron’s test statistics (zα and zt) can be viewed as Dickey
Fuller statistics that have been made robust to serial correlation by using the Newey-West
(1987) heteroskedasticity- and autocorrelation-consistent covariance matrix estimator.
15 The value of τ is determined using a grid search procedure with all values in the central 80%
of the sample being considered.
100 M. Conte Grand and V.V. D’Elia

Appendix A: Time series tests

Performing regressions assumes stationary time series. This means that the series exhibits
a mean and a variance that is constant over time. If the variables are non-stationary they
can separate from each other over time and lose their joint relationship. In this case, the
regression would be spurious, meaning that it is their dependence to time that relates the
series (Granger and Newbold, 1974). If the series are non-stationary, but their time
differences are stationary of the some order and cointegrated, i.e. the variables include
the same unit root or stochastic trend, they have a joint component and then, the
estimation of the model is valid (Greene, 2011). Cointegration can be interpreted as a sort
of long run equilibrium.
One of the most popular tests of stationarity is the Dickey-Fuller (DF) test. The
starting point is the following general model:
Yt   0    Yt 1  1  t  ut , (A1)
where  0 is a constant (also called “drift”), Yt is the series whose stationarity we test, t is
a trend and ut are taken to be independently normally distributed. Based on the
significance of the constant and the trend test we then, on the remaining model, contrast
the null hypothesis H0:  = 1 (unit root or non-stationarity). As in the presence of a unit
root the t-statistics for that coefficient  is severely biased, equation (A1) is expressed
in terms of differences subtracting the lagged value from both sides. Then,
Yt  Yt 1   0     1  Yt 1  1  t  ut , (A2)

In this model the null hypothesis tested is H0:    1 = 0 (i.e. there is a unit root and
the series is non-stationary) against H1: H0:    1 < 0 (i.e. there is no unit root and the
series is stationary). Under the null hypothesis, the statistic of the regression has a
distribution which was first estimated by Dickey and Fuller (1979) and then obtained
analytically by Phillips (1987). If the series is stationary in levels, it is integrated of
order 0: I(0). If the series became stationary after differentiating it d times, the series is
integrated of order d: I(d).
However, the Dickey-Fuller test assumes that the error terms are uncorrelated. When
the residuals are serially correlated, the Augmented Dickey-Fuller (ADF) test proposes to
include in the regression several lags of the dependent variable Yt to eliminate the serial
correlation. In this paper we perform the modified Dickey-Fuller t test (known as the DF-
GLS test) proposed by Elliott et al. (1996) to test for a unit root. Essentially, the test is an
augmented ADF test except that the time series is transformed via a generalised least
squares regression. Elliott et al. (1996) and later studies have shown that this test has
significantly greater power than the previous versions of the ADF test (Elliott et al.,
1996, p.813).
The testing procedure for the DF-GLS test is the same as for the ADF test and is
applied to the model with constant term and trend. This would imply (when applied to
equation A2):
m
Yt   0    Yt 1  1  t   i Yt i  ut (A3)
i 1

The lag lengths were chosen for each variable in each of the countries using the
procedure suggested by Ng-Perron (1995).11 The results when lag lengths equal to zero
 Relationship between CO2 emissions and GDP functional form 101

are also included. Perron (1989) showed that not considering a possible existing break
when performing the ADF test could lead to a bias that reduces the ability to reject a unit
root null hypothesis. Hence, this author suggested a unit root test that allows for a known
exogenous structural break. But, as the choice of the break point is correlated with the
data, Zivot and Andrews (1992) proposed a unit root test that allows for a single
structural break in the intercept and the trend of the series. The following equation is
estimated for the test12:
k
Yt   0    DU t    DTt    Yt 1   0  t  c j  Yt  j   t (A4)
j 1

1if t  TB
where DU t =  is a dummy variable that captures the change in the intercept,
0 if t  TB
1if t TB
and DTt =  captures the change in the tendency with TB as the time of the break.
0if t TB
The methodology of the test consists of estimating equation (A4) by OLS sequentially
for TB=2,…,T–1 with T equals to the number of observations. The null hypothesis implies
the presence of a unit root, while the alternate hypothesis is taken as trend-stationary with
a break at time TB. The test estimates the structural break data endogenously and the
break date is selected where the t statistic of the ADF test for  is at a minimum. Hence,
a break date will be chosen where the evidence is least favourable for the unit root null.
These authors derive the asymptotic distribution of the test statistics for  .
These unit root tests indicate whether the series are in level or in the first differences
stationary. When regressions between the series that are not stationary in levels can only
be run if they are integrated of the same order and cointegrated. If the series are
cointegrated it means that although they move together over time they do it in a
harmonised way so that the error between the variables does not change. The long run
relationship is represented by a linear combination of the variables that is stationary:
c1  Yt  c2  X t is I  0  , where Yt , X t are I  d  , d  0 (A5)

where c  (c1 , c2 ) is the cointegrating vector.

The conventional cointegration tests mostly used in empirical literature do not take
into account the possibility of structural breaks in the long-run relationship. Building
on Engle-Granger test (1987) Gregory and Hansen (1996a, 1996b) developed a
cointegration test accounting for structural breaks in the cointegrating equation.13 These
authors propose to use the ADF test and the zα and zt tests developed by Phillips (1987) to
test for unit root on the residuals but based on models that account for breaks.14 To do
this, they consider the following models to account for one endogenous break:
Model 1: Level Shift (C)
Yt   0  1  t  1  X t   t , t = 1,…,n (A6)

1if t  n
where t is a dummy variable such that t = 
0 if t  n
and    0,1 denotes the relative timing of the breakpoint. The structural break affects
only the intercept;  0 is the intercept before the break and 1 is the change in the
intercept at the time of the break.
102 M. Conte Grand and V.V. D’Elia

Model 2: Level Shift with Trend (C/T)

Yt   0  1  t  1  t  1  X t   t , t = 1,…,n (A7)
Model 3: Regime Shift where intercept and slope coefficients change (C/S)
Yt   0  1  t  1  X t   2  X t  t   t , t = 1,…,n (A8)
The structural break affects both the intercept and the slope coefficient.
The null hypothesis of no cointegration with structural breaks is tested against the
alternative of cointegration. The single break date on these models is endogenously
determined by estimating the cointegration equations for all possible break dates in the
sample.15 The break date selected is that where the test statistic is the minimum. The
residual  t , produced by the model at each value of τ is saved and employed in the
following Dickey-Fuller testing equation:
ADF *  ˆ     1  t  v (A9)

The minimum value obtained for the t statistics of    1 is declared as the test statistics
for each model. Gregory and Hansen have tabulated critical values by modifying the
MacKinnon (1990) procedure. The null hypothesis of Gregory and Hansen tests is that
there is a unit root in the residuals and hence there is no cointegration while the
alternative hypothesis is that there is no unit root in the residuals and hence there is
cointegration with a single unknown break. The null hypothesis is rejected if the statistic
ADF* is smaller than the corresponding critical value. The test statistics can also be
measured using the Phillips (1987) test statistics that are denoted as z* and zt* .

Appendix B

Table B1 Results for the Gregory-Hansen cointegration test for European Union Countries
Gregory Hansen cointegration tests
Functional Break Break
Country/Model ADF* zt* zα*
form time time
European Union
Austria Box Cox
C ‐3.49 1968 ‐3.52 ‐21.3 1968
C/T ‐4.1 1968 ‐4.26 ‐27.2 1967
C/S ‐3.45 1977 ‐3.74 ‐23.75 1978
C/S/T ‐4.69 1976 ‐4.28 ‐28.63 1974
Czech Republic Log‐Log
C ‐4.74 ** 1972 ‐5.18 *** ‐21.15 1962
C/T ‐5.41 ** 1970 ‐5.17 ** ‐25.22 1970
C/S ‐4.8 * 1972 ‐5.16 ** ‐17.1 1973
C/S/T ‐6.19 *** 1970 ‐5.51 ** ‐26.5 1970
Denmark Box Cox
C ‐3.57 2002 ‐3.61 ‐22.56 1967
C/T ‐4.81 * 1998 ‐4.6 ‐28.63 1998
C/S ‐3.55 1998 ‐3.58 ‐22.22 1967
C/S/T ‐4.56 1995 ‐4.4 ‐28.35 1983
Finland Box Cox
C ‐3.67 1969 ‐3.74 ‐24.25 1968
C/T ‐3.63 1969 ‐3.7 ‐25.56 1967
C/S ‐3.78 1979 ‐3.82 ‐26.73 1979
C/S/T ‐3.94 1979 ‐3.98 ‐29.47 1979
 Relationship between CO2 emissions and GDP functional form 103

Table B1 Results for the Gregory-Hansen cointegration test for European Union Countries (cont..)
Gregory Hansen cointegration tests
Functional Break Break
Country/Model ADF* zt* zα*
form time time
Germany Log‐l i n
C ‐5.55 *** 1966 ‐5.62 *** ‐36.09 1966
C/T ‐5.33 ** 1966 ‐5.33 ** ‐33.86 1966
C/S ‐5.29 ** 1970 ‐5.35 ** ‐34.63 1970
C/S/T ‐6.57 *** 1978 ‐6.65 *** ‐44.29 1978
Greece Box Cox
C ‐2.01 1972 ‐3.35 ‐17.63 1980
C/T ‐4.33 1982 ‐4.9 * ‐30.77 1983
C/S ‐4.32 1985 ‐5.74 *** ‐37.13 1984
C/S/T ‐4.09 1992 ‐5.82 ** ‐39.84 1987
Hungary Box Cox
C ‐7.06 *** 1976 ‐8.53 *** ‐24.34 1977
C/T ‐6.16 *** 1969 ‐8.1 *** ‐30.84 1971
C/S ‐6.78 *** 1974 ‐8.56 *** ‐24.44 1975
C/S/T ‐6.41 *** 1969 ‐7.38 *** ‐31.12 1966
Ireland Box Cox
C ‐4.96 ** 1996 ‐4.87 ** ‐31.69 1996
C/T ‐4.07 1981 ‐5.58 *** ‐37 1965
C/S ‐3.78 1986 ‐5.62 *** ‐37.47 1995
C/S/T ‐1.92 1976 ‐7.61 *** ‐47.97 1988
Luxembourg Log‐Log
C ‐3.76 1980 ‐3.44 ‐15.65 1982
C/T ‐3.85 1980 ‐3.5 ‐16.34 1978
C/S ‐3.93 1977 ‐3.62 ‐17.79 1978
C/S/T ‐4.41 1980 ‐3.48 ‐16.18 1978
Portugal Box Cox
C ‐3.63 2004 ‐3.66 ‐21.65 2004
C/T ‐4.35 2004 ‐4.43 ‐28.36 2004
C/S ‐3.6 1989 ‐3.6 ‐21.5 1989
C/S/T ‐5.78 ** 1973 ‐5.84 ** ‐41.49 1973
Slovakia Log‐Log
C ‐4.36 * 1977 ‐4.48 * ‐20.72 1977
C/T ‐4.8 * 1975 ‐4.75 * ‐22.06 1969
C/S ‐4.29 1973 ‐4.41 ‐21.06 1973
C/S/T ‐4.29 1967 ‐5.21 ‐22.65 1969
Spain Box Cox
C ‐3.82 1970 ‐3.63 ‐16.57 2001
C/T ‐3.76 1974 ‐3.99 ‐17.57 1996
C/S ‐3.82 1970 ‐3.63 ‐16.57 2001
C/S/T ‐4.56 1984 ‐4.73 ‐28.83 1985
Sweden Log‐Log
C ‐3.39 1967 ‐3.6 ‐17.62 1967
C/T ‐3.82 1989 ‐3.73 ‐20.33 1990
C/S ‐3.67 1978 ‐3.7 ‐23.03 1978
C/S/T ‐4.46 1992 ‐4.68 ‐30.63 1992
United Kingdom Linea r
C ‐3.38 1978 ‐3.41 ‐19.71 1978
C/T ‐4.26 1967 ‐4.3 ‐26.51 1967
C/S ‐4.34 1975 ‐3.73 ‐23.45 1972
C/S/T ‐4.58 1987 ‐4.45 ‐27.03 1971

Notes: The lag length was selected using the Akaike Information Criterion out of a
maximum lag of 5.
*, **, *** denote 10%, 5% and 1% of significance, respectively.
104 M. Conte Grand and V.V. D’Elia

Table B2 Results for the Gregory-Hansen cointegration test for CELAC countries
Gregory Hansen cointegration tests
Functional Break Break
Country/Model ADF* zt* zα*
form time time
CELAC
Argentina Box Cox
C ‐5.2 *** 1983 ‐4.75 ** ‐30.24 1985
C/T ‐5.44 ** 1968 ‐4.91 * ‐31.78 1967
C/S ‐5.24 ** 1984 ‐4.95 ** ‐32.25 1985
C/S/T ‐5.79 ** 1976 ‐4.9 ‐31.98 1985
Bolivia Box Cox
C ‐3.25 1980 ‐3.46 ‐18.36 1980
C/T ‐4.42 1994 ‐3.84 ‐21.54 1996
C/S ‐3.36 1985 ‐3.43 ‐18.28 1980
C/S/T ‐5.16 1995 ‐4.63 ‐29.69 1996
Chile Box Cox
C ‐3.99 1978 ‐3.97 ‐22.28 1978
C/T ‐4.74 * 1967 ‐4.67 ‐28.89 1967
C/S ‐3.36 1985 ‐3.43 ‐18.28 1980
C/S/T ‐5.16 1995 ‐4.63 ‐29.69 1996
Costa Rica Box Cox
C ‐3.56 1980 ‐3.6 ‐24 1980
C/T ‐4.73 * 1990 ‐4.77 * ‐32.7 1990
C/S ‐3.76 1992 ‐3.75 ‐24.69 1980
C/S/T ‐5.01 1989 ‐5.06 ‐35.97 1980
Panama Log‐Log
C ‐4.05 1981 ‐4.22 ‐29.51 1979
C/T ‐4.06 1981 ‐4.23 ‐29.51 1979
C/S ‐4.74 1979 ‐4.91 ‐34.68 1978
C/S/T ‐4.91 * 1986 ‐5.06 ‐34.77 1979
Paraguay Box Cox
C ‐4.75 ** 1992 ‐4.61 ** ‐28.29 1992
C/T ‐5.3 ** 1992 ‐5.21 ** ‐32.65 1993
C/S ‐5.4 ** 1992 ‐5.45 ** ‐35.07 1993
C/S/T ‐5.4 * 1993 ‐5.45 * ‐35.64 1993
Uruguay Log‐l i n
C ‐4.94 ** 1981 ‐5.17 *** ‐35.65 1981
C/T ‐5.41 ** 1981 ‐5.66 *** ‐4016 1981
C/S ‐5 ** 1981 ‐5.25 ** ‐36.49 1981
C/S/T ‐5.82 ** 1981 ‐6.01 *** ‐43.69
Venezuela Box Cox
C ‐5.07 ** 1980 ‐5.12 ** ‐33.73 1980
C/T ‐5 ** 1978 ‐4.98 * ‐33.61 1978
C/S ‐5.09 ** 1978 ‐5.14 ** ‐34.64 1978
C/S/T ‐5.62 ** 1978 ‐5.68 ** ‐40.79 1978

Notes: The lag length was selected using the Akaike Information Criterion out of a
maximum lag of 5.
*, **, *** denote 10%, 5% and 1% of significance, respectively.
 Relationship between CO2 emissions and GDP functional form 105

Appendix C

Figure C1 CO2 emissions and GDP by countries

Czech Republic Denmark Estonia

100000 150000 200000

400000

20000
200000
0

0
1990 1995 2000 2005 2010 1960 1970 1980 1990 2000 2010 1995 2000 2005 2010 2015

Germany Greece Hungary

400000

100000 150000
1.0e+062.0e+063.0e+06

200000

50000
0

1970 1980 1990 2000 2010 1960 1970 1980 1990 2000 2010 1990 1995 2000 2005 2010

Ireland Portugal Slovakia

100000 200000

40000 60000 80000

100000 200000
0

1970 1980 1990 2000 2010 1960 1970 1980 1990 2000 2010 1990 1995 2000 2005 2010

Year

(a) European Union

Argentina Brazil Chile

400000

200000
500000 1.0e+06
200000
0

1960 1970 1980 1990 2000 2010 1960 1970 1980 1990 2000 2010 1960 1970 1980 1990 2000 2010

Costa Rica Panama Paraguay

30000

40000

10000
20000

20000

5000
0 10000

1960 1970 1980 1990 2000 2010 1960 1970 1980 1990 2000 2010 1960 1970 1980 1990 2000 2010

Uruguay Venezuela
40000

100000 200000
20000
0

1960 1970 1980 1990 2000 2010 1960 1970 1980 1990 2000 2010

Year

(b) CELAC

Note: The solid lines denote GDP in millions (constant US$, 2005) and the dashes
shows thousands of metric tons of CO2 (MtCO2).
106 M. Conte Grand and V.V. D’Elia

Appendix D

Figure D1 Relationship between emissions and GDP in countries having series with structural
breaks

Italy Latvia
500000
Total CO2 Emissions (MtCO2)

5000 10000 15000 20000

0

500000 1.0e+06 1.5e+06 2.0e+06 5000 10000 15000 20000

GDP (Million US$, 2005)

Note: The dots indicate the observed values and the lines are the fitted values.

Figure D2 CO2 emissions and GDP in countries having series with structural breaks

Italy Latvia
2.0e+06

20000
15000
1.0e+06

10000
5000
0

1960 1970 1980 1990 2000 2010 1960 1970 1980 1990 2000 2010

Year

Note: The solid lines denote GDP in millions (constant US$, 2005) and the dashes
shows thousands of metric tons of CO2 (MtCO2).