The relationship between temperature and CO2 emissions: evidence from a short and very long dataset

Citation

McMillan D & Wohar ME (2013) The relationship between temperature and CO2 emissions: evidence from a short and very long dataset. Applied Economics, 45 (26), pp. 3683-3690. https://doi.org/10.1080/00036846.2012.729955

Abstract
The debate regarding rising temperatures and CO2emissions has attracted the attention of economists employing recent econometric techniques. This article extends the previous literature using a dataset that covers 800 000 years, as well as a shorter dataset, and examines the interaction between temperature and CO2emissions. Unit root tests reveal a difference between the two datasets. For the long dataset, all tests support the view that both temperature and CO2are stationary around a constant. For the short dataset, temperature exhibits trend-stationary behaviour, while CO2contains a unit root. This result is robust to nonlinear trends or trend breaks. Modelling the long dataset reveals that while contemporaneous CO2appears positive and significant in the temperature equation, including lags results in a joint effect that is near zero. This result is confirmed using a different lag structure and Vector Autoregressive (VAR) model. A Generalized Method of Moments (GMM) approach to account for endogeneity suggests an insignificant relationship. In sum, the key result from our analysis is that CO2has, at best, a weak relationship with temperature, while there is no evidence of trending when using a sufficiently long dataset. Thus, as a secondary result we highlight the danger of using a small sample in this context.

Keywords
temperature; CO2; stationarity; VAR

Journal
Applied Economics: Volume 45, Issue 26

People

Professor David McMillan

Professor in Finance, Accounting & Finance