Decoupling of CO2 emissions and income in the U.S.: A new look from EKC

Abstract

This paper attempts to analyze decoupling between CO₂ emissions and income growth in the U.S. through the lens of Environmental Kuznets curve (EKC). Many states in the U.S. have achieved absolute decoupling in recent years, which means that CO₂ emissions have decreased while the economy grows. This is partly due to the adoption of low-emission technologies, such as coal to gas switching, nuclear power, and economic restructuring towards a more sustainable economy. We argue that understanding decoupling is crucial to implement effective climate change policies. This study suggests that, after 2015, EKC has taken on the U-shaped form with many states currently located on the negatively sloped portion of the curve. It is not desirable as emissions may eventually begin to increase as the economy grows. To support this claim, we estimate panel fixed effects rolling-window EKCs using two-stage least square with two instrumental variables, unemployment rate and the trend variable. Empirical results show how the inverted U-shaped EKC has transformed into the U-shaped EKC in the U.S. This transformation is probably caused by the recent increases in emissions in transportation sector, strong electricity demand in recent years with cold winter seasons, reversals of eco-friendly energy policies, and manufacturers’ onshoring. Stakeholders should make efforts to transform the U-shaped EKC back to an inverted U-shaped EKC even in cases where absolute decoupling is observed.