Investigating the drivers of CO2 emissions in the EU: Advanced estimation with common correlated effects and common factors models

Abstract

The aim of this paper is to investigate the dependence of carbon dioxide (CO2) emissions on various factors, including GDP, total energy consumption, renewable energy, nuclear energy, urbanisation, energy intensity, energy import dependency, and industry share of GDP, in 22 European countries from 1992 to 2019. To achieve this objective, standard panel models are used, along with advanced estimation techniques such as the Common Correlated Effect Estimator (CCE) and Instrumental-Variable Estimation Panel Models with Common Factor (2SIV - two-stage IV approach). The results of the analysis show that several factors exhibit a significant impact on CO2 emissions. Based on the 2SIV (MG) model, an increase in renewable energy production is associated with a reduction in CO2 emissions, as shown by the coefficient of –0.0924. In addition, the expansion of nuclear power plant energy production also contributes to emission reductions, although with a lower coefficient of –0.0088. In contrast, an increase in energy consumption is found to be strongly positively correlated with CO2 emissions, as indicated by a significant coefficient of 1.399. Additionally, a mitigating effect of Energy Intensity on CO2 emissions within the context of the 2SIV models is uncovered. This suggests that improvements in energy efficiency and technological progress may lead to a decoupling of energy intensity from CO2 emissions. The study contributes to the existing literature on the determinants of CO2 emissions by examining a wide range of factors and using advanced estimation techniques. The results underline the importance of economic and energy-related factors in shaping decarbonisation pathways in European countries, and highlight the importance of adopting sustainable energy practices and policies to mitigate climate change.