The impact of CO2 emissions and climate on economic growth and productivity: International evidence

• Published date: 01 May 2024
• Author: Nikos Rigas,Konstantinos Elias Kounetas
• Date: 01 May 2024
• DOI: http://doi.org/10.1111/rode.13075

REGULAR ARTICLE

The impact of CO

2

emissions and climate

on economic growth and productivity:

International evidence

Nikos Rigas | Konstantinos Elias Kounetas

Department of Economics, University of

Patras, Patras, Greece

Correspondence

KonstantinosElias Kounetas, Department

of Economics,University of Patras,

Rio 26504, Patras,Greece.

Email: kounetas@upatras.gr

Abstract

In this study, we apply a detailed country level data

in the 1961–2015 period to investigate the relation-

ship between weather variables, CO

2

,shareofrenew-

able energy sources, grossdomesticproduct,and

total factor productivity in a standard Cobb–Douglas

production function by using an instrumental vari-

able approach. Our findings suggest that economic

growth has been positively affected by temperature

and CO

2

emissions, while climate vulnerability varies

significantly between rich-poor countries. Further-

more, the negative nexus between renewable sources

and CO

2

emissions demonstrates its importance for

optimal environmental policies design while an

inverted U-shaped relationship for temperature and

emissions.

KEYWORDS

CO

2

emissions, climate change, countries' total factor

productivity, renewable energy sources, temperature

JEL CLASSIFICATION

Q54, C26, O44

Received: 21 December 2022 Revised: 25 September 2023 Accepted: 15 November 2023

DOI: 10.1111/rode.13075

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distrib ution and

reproduction in any medium, provided the original work is properly cited.

© 2023 The Authors. Review of Development Economics published by John Wiley & Sons Ltd.

Rev Dev Econ. 2024;28:719–740. wileyonlinelibrary.com/journal/rode 719

1|INTRODUCTION

One of the most critical issues contemporaneous generations are faced with is that of climate

crisis that has emerged over the past decades. Not only does climate change create unfriendly

environmental conditions for citizens, cities, and regions that are influenced by extreme

weather conditions, but it also has an impact on the economy of countries both at regional and

country level (Burke et al., 2015; Dell et al., 2014; Lochner et al., 2023). Several studies

(Tol, 2009,2010) have proven that climate change through rising temperature records has a

negative impact on the economy. Also, if humanity fails to mitigate the warming effect that is

currently being conducted, the economic impact will also be persistent and more damaging for

poor countries (Burke et al., 2015; Stern & Stern, 2007). To deal with the problem many coun-

tries signed the Paris agreement; a transnational convention that aims to increase the capability

of all governments to manage the implications deriving from climate change, obtain stable

economies harmonized with low carbon emissions, and become resistant to the problem of cli-

mate change. Moreover, in a very recent reaction European Union (EU) has come to a

European Green Deal, the most ambitious package of measures that should enable European

citizens and businesses to benefit from sustainable green transition. Finally, United Nations

Framework Convention on Climate Change in an attempt to assess the progress that countries

make in order to achieve the climate objectives, host the conference of the parties (COP) that

covers a variety of issues, such as development, finance, technology, and human rights. The

27th COP has concluded to the creation of a fund that will cover the costs and losses that are

generated from climate damages (Wyns, 2023).

By using the term climate change we refer to the human made change of meteorological or

natural phenomena that holds for long time periods causing global warming, deforestation,

melting of permafrost and other risky effects that result in dangerous paths (Stern et al., 2006).

Furthermore, increasing atmospheric concentrations of Greenhouse Gases (GHG) over the past

decades are the main contributor to the deterioration of environmental quality (Stern &

Stern, 2007). GHGs' trap heat in the lower atmosphere and keep earth warmer causing many

disasters (Stern et al., 2006). Thus, many scientists argue that the increase of anthropogenic

GHGs alters the climate producing changes in surface temperature and precipitation (Brown

et al., 2016). From their side, economists (Tol, 2005,2018) consider these effects as of increasing

interest for countries' economic growth and total factor productivity (TFP). The most comm only

used GHGs are carbon dioxide (CO

2

) (Caron & Fally, 2018; Pindyck, 2020), methane (CH

4

)

(Benavides et al., 2017) and Particulate Matters 2.5 (PM2:5) or Particulate Matters 10 (PM10)

(Chen et al., 2018) in order to investigate the risk derived from increasing emissions and their

impact on the economy (Chen & Santos-Paulino, 2013).

The uncontrollable environmental pollution, mainly from pollutant releases of the transpor-

tation and industry sector, has caused the greenhouse effect which is responsible for the

increase of temperature and the climate change that is being conducted. Climate change risks

can also cause economic shocks, meaning unpredictable events that bring significant harm

within an economy (Batten, 2018), especially on the agricultural sector, which is the most vul-

nerable sector of the economy due to the nature of its work (Arndt et al., 2012; Cline, 2007; Des-

chênes & Greenstone, 2007; Mendelsohn, 2008). Hence, an issue of critical importance in

climate, environmental, and development economics involves understanding the economic

impact and consequences of changes in surface temperatures. Consequently, when estimating

the impact of climate change on gross domestic product (GDP) and TFP, temperature cannot be

considered as strictly exogenous (Kahn et al., 2019).

720 RIGAS and KOUNETAS