A wavelet-based model of world oil shocks interaction with CO2 emissions in the US

Abstract

Recently, significant interaction has been established for oil price shocks with some economic and financial variables, yet our understanding of the environmental burdens of oil price shocks is still limited. We study the co-movements between oil shocks and CO2 emissions intensity in the United States from February 1975 to July 2018 using wavelet techniques. Key findings suggest that the dis-aggregation of oil price shocks into demand and supply shocks yield novel insights into the pattern of co-movements between oil shocks-CO2 emissions relationships across different frequency bands and scales. Moreover, we find that higher oil prices triggered by oil demand and global economic activity shocks cannot serve as a substitute for environmental policies aiming at reducing carbon emissions. Contrary to expectations, we highlight that oil supply shock does not result in lower levels of carbon emissions in the U.S. Besides, we also show that an increase in the intensity of CO2 emissions leads to more uncertainty in the global oil market and drives down oil inventory across different frequency bands. Given the strong predictability of the oil price shocks for environmental burdens, it is hoped that our results will trigger further discussion on environmental problems.