Nonlinearity between CO2 Emission and Economic Development: Evidence from a Functional Coefficient Panel Approach

This paper investigates the nonlinear relationship between CO2 emission and economic development using a newly developed functional coefficient panel model. In contrast to the existing literature, which suggests that the income elasticity of CO2 emission is parametrically modeled as a function of income, the income coefficient of CO2 emission is set as a function of both income and time. Then, we estimate the income elasticity in a nonparametric way using the country panel data covering 1971–2017. By doing so, we impose richer dynamics to the income elasticity not only over income but also over time. Our empirical results indicate that the income elasticity has decreased over time for high-income countries, whereas it has increased over time for low-income countries.