Economic activity and C02 emissions in Spain

Carbon dioxide (CO2) emissions, largely by-products of energy consumption, account for the largest share of greenhouse gases (GHG). The addition of GHG to the atmosphere disturbs the earth's radiative balance, leading to an increase in the earth's surface temperature and to related effects on climate, sea level rise, ocean acidification and world agriculture, among other effects. Forecasting and designing policies to curb CO2 emissions globally is gaining interest. In this paper, we look at the relationship between CO2 emissions and economic activity using Spanish data from 1964 to 2020. We consider a structural (contemporaneous) equation between selected indicators of economic activity and CO2 emissions, that we further augment with dynamic common factors extracted from a large macroeconomic database. We show that the way the common factors are extracted is crucial to exploit their information content. In particular, when using standard methods to extract the common factors from large data sets, once private consumption and maritime transportation are considered, the information contained in the macroeconomic data set has only negligible explanatory power for emissions. However, if we extract the common factors oriented towards CO2 emissions, they add valuable information not contained in the individual economic indicators.