Decoupling economic output and carbon emissions: How is Europe doing?

Here I am following up on a post in which I have taken a look on how Europe is doing regarding its own climate action commitments for 2030 and 2050. 

Bottom line: Not too good.

To be fair, it was an admittedly blunt look that was, ignoring all the potential future blessings from public policy and technology, based on as little as the key historical facts: the actual dynamics of EU greenhouse gas emissions from the reference year 1990 onwards.

But there are good news hidden even in the historical data. Let me explain.

Actually, we could bring down carbon emissions to zero, right now. 

How? Well, all we need to do is to shut down all carbon emitting activities. Weird claim, but it's obviously true. It's the extreme point of a relationship that economists call scale effect.  

The scale effect is the direct relationship between economic output and carbon emissions. It's the result of a thought experiment in which output of an economy is changed while the sectoral composition and the technologies used are kept constant. Under that premise, emissions change proportionally with output. Five percent change of output means a five percent change of emissions. And vice versa.

That's essentially the idea behind the sufficiency approach to climate action: less consumption means less production, which in turn means less emissions. It has merit. The 2020 lockdown due to the Covid-19 pandemic showed the scale effect at work: global carbon emissions plummeted. 

But even the most die-hard growth critics realize that the scale effect cannot be the whole story. With the scale effect alone, zero emissions would be synonymous with zero output. Zero output means zero income and consumption. This will just not work out. There must be another way.

There is. If we could somehow decouple carbon emissions and economic output, then reasonable economic growth and declining emissions is feasible at the same time.

Such decoupling can be achieved in two ways. One is the shift of economic activity to sectors that are less carbon-intensive, for example from heavy industry to the service sector. This can happen either by political control or a change in consumer values.

The second mechanism for decoupling is the deployment of more climate friendly technologies. If we generate our electricity by wind and solar power instead of burning coal, for example, emissions will decrease even if consumption patterns remain unchanged. 

Carbon emissions data generally reflect both scale and decoupling effects. That's also true for the EU-27 time series that I have examined in my previous post.

To isolate the two effects, we need to hold economic output artificially constant over time. We can do this in two simple steps. But before we go into that, let me talk clear about how economic output is measured in the first place.

Economists measure aggregate output of an economy by gross domestic output (GDP), which is the sum of all goods and services produced in the economy within a given period, usually a year, weighted by market prices. By this weighting, the quantities of all the different apples and oranges can be meaningfully added up, to get a single number measured in the currency the prices are measured in. For Europe, the standard currency is the Euro.

Since GDP can change even if all the output quantities are constant, namely by changes in prices (inflation or deflation), economists use a price index (or deflator) to hold the price level artificially constant over time. The price index is defined relative to an arbitrary base year, in which the index is set equal to unity. GDP divided by the price index yields "real GDP".

Here I’m using the EU-27 annual GDP time series at current market prices (measured in Euros) and the price index with base year 2015 from Eurostat's GDP and Main Components Database (NAMA_10_GDP) to calculate a real GDP series at 2015 prices. However, integrated GDP data for the EU compiled under the European System of National and Regional Accounts is only available for 1995 onwards. So I use the real GDP growth rates from the IMF World Economic Outlook to continue the series back to 1990.

Given the basics, let's calculate the conditional time series of emissions with output held constant in two steps. First, in any given year, divide emissions by real GDP. That number is called carbon intensity, and it measures the average quantity of emissions (in tons of CO2-equivalent) per Euro of output. 

Second, in any given year, multiply carbon intensity with real GDP in the reference year. I take 1990, because that's also the reference year of the EU's emissions targets.

Here is the result, namely the conditional trend of the EU's carbon emissions if real GDP would not have changed since 1990:

The grey bars depict yearly emissions, the solid line shows the linear trend, and the dashed line represents the EU's 2030 target to cut emissions by 40% by 2030 relative to 1990. See my previous post for details. 

What do we learn from the data? Well, Europe is actually doing not that bad in decoupling carbon emissions and economic output. Without economic growth since 1990, the EU would easily achieve the 2030 target, and a close-to-zero emissions economy by 2050 would be in reach.

But the scale effect works against us. The average European has a higher real income compared to 1990, which is a good thing. But the associated growth in output has eaten up a sizable fraction of the decoupling effect. 

Last minor revision on September 28, 2020.

The theme image is derived from a photograph by Towfiqu Barbhuiya under non-commerical license.