Asymmetric effects of the business cycle on carbon dioxide emissions

Long-term carbon dioxide emissions forecasts rely on the assumption that the economic growth rate is constant over long time horizons and exclude the business cycle, thereby ignoring a fundamental component of the macroeconomy. This paper considers how the business cycle affects emissions forecasts and shows the implicit assumption in current forecasts, that the elasticity of emissions is constant with respect to GDP, is wrong. In the United States, emissions fall more sharply when GDP declines than they rise when GDP increases. This is partly due to a decrease in industrial energy intensity as GDP declines. A simulation shows that accounting for the business cycle results in 5% lower cumulative emissions through 2050 relative to the baseline forecast. (C) 2016 Elsevier B.V. All rights reserved.