A Nonlinear Analysis of CO2-Income Relation for Advanced Countries

We study long run carbon emissions - income relationships for advanced countries grouped in policy relevant groups - North America and Oceania, South Europe, North Europe. By relying on recent advances on Generalized Additive Models and adopting interaction models, we handle simultaneously three main econometric issues, named here as functional form bias, heterogeneity bias and omitted time related factors bias, which have been proved to be relevant but have been addressed separately in previous papers. We consider a model which includes both country-specific nonparametric time effects and country-specic nonparametric income effects. We find that country-specic time related factors weight more than income in driving the northern EU Environmental Kuznets Curves, that cross country heterogeneity is high and that only two countries - Finland and Sweden - show bell shapes for both income and time relationships to CO2. Overall, the countries differ more on their carbon-time relation than on the carbon-income relation which is in almost all cases monotonic positive. The former may represent idiosyncratic innovation, energy and policy features of the countries under study.