The effect of inflation on CO2 emissions: An analysis over the period 1970–2020

Abstract

Does inflation affect CO2 emissions? Surprisingly, this crucial relationship has not benefited from enough academic attention. As a result, we fill this knowledge gap and examine conceptually and empirically the effect of inflation on CO2 emissions over a large sample of countries (N = 189) and a 50-year period (1970–2020). More precisely, we run fixed effects regressions and panel cointegration tests. We find a modest, but significant negative relationship between core inflation and CO2 emissions per capita. The effect is also present for total CO2 emissions. Nevertheless, this effect is too weak to reach recommended CO2 emission reductions. Ceteris paribus, a 10-percentage points increase of core inflation over a 5-year span leads, on average, to a reduction of CO2 emissions per capita by roughly 0.36. This implies that other policies are needed.