Greenhouse Gas, Carbon Dioxide Emissions and Economic Growth: Empirical Evidence from Threshold Effect

Abstract

Climate change poses the serious challenge of greenhouse gas emissions reduction with much concern over carbon dioxide (CO2) which is the main component of overall greenhouse gas emissions. Emissions control by developing countries is becoming a key for effective mitigation of climate change, as these countries now account for more than a half of global emissions and are still expanding their energy infrastructures. One solution to this is by reducing greenhouse gas emissions to achieve the target of mitigating global warming. However, reducing CO2 emissions means decreasing a country’s industrial production, and it is likely to decrease gross domestic product (GDP) growth, employment, etc. In other words, achieving a higher growth will induce more emissions of CO2 thus deepening the climate crisis with disturbing long-run consequences, both economically and socially. Therefore, how to effectively control greenhouse gas emissions especially the emissions of CO2 and to achieve a sustainable economic growth at the same time is a serious problem in policy-makings. Although a large amount of academic researches have been devoted to climate change, the overall climate change effect to growth is not conclusive for developed and developing countries. Previous studies suggest that there is a linear effect of climate change to growth, neglecting the non-linearity issue between climate change and growth. Through this present study, we address the issue of the existence of threshold effects in the relationship between climate change and growth rate of GDP in the context of global data, using new endogenous panel threshold autoregressive (TAR) model. Our main interest is to provide answer to the question whether climate change can affect long-run economic growth. With threshold regression models, we find that the effect of climate change on growth varies with the level of GDP per capita. In assessing the effect of greenhouse gas emissions to GDP growth, double threshold effect and three regimes are discovered. The assessment of the effect of CO2 emissions to GDP growth has detected single threshold indicating only two regimes exist.