The odd couple: The relationship between state economic performance and carbon emissions economic intensity

Historical time trends indicate that both carbon and energy intensity have declined in the United States over the last several decades, while economic performance, as measured by per capita GSP, has improved. This observation indicates that it may be possible to reduce carbon intensity without a reduction in economic performance. This paper assesses using panel analysis, the empirical relationship between carbon emissions intensity and economic performance, and examines the direction of causality between the two variables. Data for the analysis covered 48 states, excluding Hawaii, Alaska, and Washington DC, from 1980 to 2000. The results indicate significant bi-directional relationship between carbon emissions intensity and state economic performance, both using an aggregate indicator for carbon emissions intensity, decomposed using Laspeyres indexes and disaggregated by sector. This implies that it should be possible to implement statewide and sector-specific policies to reduce energy and carbon intensity and at the same time improve economic performance.

► The empirical relationship between carbon emissions intensity and economic performance is assessed
► The direction of causality between the two variables is examined.
► Results indicate significant relationship between carbon emissions intensity and state economic performance.
► Relationship is bi-directional, and holds for both aggregate analysis and by sector.
► It is possible to implement policies to reduce carbon intensity and improve economic performance.