Energy Efficiency and Fluctuations in CO2 Emissions

Can emissions be mitigated without limiting economic growth? Researchers have commonly modelled carbon dioxide emissions to rise and fall with total economic activity. This implies a short-term trade-off between environmental protection and economic growth. Yet many factors, such as changes to energy efficiency, extreme weather or shifts to cleaner energy sources, can break this relationship.

Our study is the first to evaluate the importance of these factors for emissions in the United States. We estimate a series of statistical innovations that reduce emissions without lowering economic activity. This series explains a significant proportion of fluctuations in emissions. Based on a broad analysis of the impulse responses of macroeconomic and environmental variables, we conclude that the estimated series mainly reflects changes in the energy efficiency of consumption goods.

Our results suggest that models that do not incorporate changes to energy efficiency may overestimate the short-term trade-off between environmental protection and economic performance. Our findings also provide empirical support for the role of energy efficiency improvements, particularly in the residential sector, in mitigating emissions without slowing economic growth.