Hidden regimes and the demand for carbon dioxide from motor-gasoline

- Focused analysis of motor-gasoline emissions
- Motor-gasoline emissions have two different hidden regimes.
- Hidden regimes correspond with economic expansions and contractions.

Perhaps the most tactile source of anthropogenic carbon dioxide (CO2) emissions stem from vehicle-use. Because consumers are well aware of their price and quantity decisions it is likely that consumer demand for CO2 emissions from motor-gasoline are quite responsive to the overall state of the economy. Using a structurally identified Markov-switching demand model I find that CO2 emissions respond asymmetrically to changes in income and the price of gasoline in expansionary and contracting states of the economy. The findings of this paper indicate that flexible policy instruments have the potential to mitigate undue burden on consumers and producers compared to their static counterparts.