Environmental risk of Covid-19 recovery

Abstract

During Covid-19 pandemic world economy experienced negative growth rate, therefore energy consumption and consequently emission pollution decreased. According to Environmental Kuznets Curve, it is expected that energy consumption and emission pollution increase in response to Covid-19 economic recovery, even higher than its pre-pandemic level. The goal of this paper is to study the environmental risk of Covid-19 economic recovery. We use an Environmentally-Augmented Global Vector Autoregressive Model (E-GVAR) to trace dynamic effects of Covid-19 economic recovery on pollution emission. Using generalized impulse response functions (GIRFs), we investigated the effect of positive economic shocks in real per capita income in China and USA economies on total equivalent emission pollution. The results show that positive economic recovery affects emission pollution significantly. China and emerging economies may experience high risk while Europe region is moderately affected by this positive shock. A positive Economic Shock in China decrease pollution emission in USA over time. It can be attributed to substitution effect of Chinese product in global market. Generally, our results demonstrate spillover effect of transition shocks from large economies to the rest of world and highlights the importance of linkages in the world economy.