Carbon emission cycles in the U.S.: Greening through browning?

This paper analyzes the driving factors behind the business cycle dynamics of carbon emissions in the U.S. economy from 1975Q1 to 2023Q3. We first identify some key stylized facts regarding the correlation between carbon emissions and the different components of the Kaya decomposition, some of which exhibit a sharp change in sign around the trend reversal of the environmental Kuznets curve in the late 20th century. From the estimated distribution of shocks in a dynamic stochastic general equilibrium environmental model, we find that: (a) innovations in green energy production play a marginal role in U.S. emissions cycles; (b) barely 17 percent of total emissions cycles are explained by aggregate shocks like those to total factor productivity or household consumption, while the rest stem from innovations in the efficiency in production of brown energy (brown energy productivity shock) and emissions per unit of brown energy; (c) since 2000, brown energy shocks have positively affected (increased) emissions growth, while emissions technology shocks have negatively impacted emissions, particularly following a structural break around 2007; and (d) without these shocks, the U.S. would have experienced a negative emissions gap for over 40 years. Since 2007, emissions reduction has accelerated, leading to convergence of observed and counterfactual Kuznets curves at around $16,000 per capita GDP. Our findings explain the intriguing negative correlation between emissions and the share of dirty energy observed over the past twenty years. They suggest a connection to innovations in shale oil and gas production, highlighting both the limited potential for emission reduction through advances in producing a "cleaner" brown energy mix, and the urgent need for a decisive shift to renewable energy to achieve long-term climate goals.