Do Greenhouse Gas Emission Reductions Affect Economic Growth? Evidence from the EU-27 Using Local Projections

Do Greenhouse Gas Emission Reductions Affect Economic Growth? Evidence from the EU-27 Using Local Projections | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Do Greenhouse Gas Emission Reductions Affect Economic Growth? Evidence from the EU-27 Using Local Projections Aránzazu de Juan Fernández This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-9629419/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract This paper estimates the dynamic macroeconomic effects of greenhouse gas emission reductions on per-capita GDP in the EU-27 over 1995–2024 using Local Projections (Jordà, 2005). We analyse four gases (CO2, CO2bio, CH4, and N2O) at the aggregate EU-27 level, by country, and by IPCC activity sector. Our approach identifies the output cost of actual emission reductions—a distinct causal object from the carbonpriceeffects estimated by Metcalf and Stock (2023): a direct empirical comparison shows that price-based and quantity-based Local Projections yield opposite signs, confirming that they identify different structural parameters. Six findings emerge. First, fossil CO2 reductions carry a statistically robust negative effect on GDP, peaking at −0.10 pp per 1% reduction at a two-year horizon. Second, annual estimates for CH4 and N2O reveal consistently negative directional patterns invisible at quarterly frequency, reflecting a signal-to-noise limitation rather than genuine economic independence. Third, CO2 effects are strongly state-dependent: expansion-period costs are approximately twice as large as recession-period costs. Fourth, cross-country heterogeneity maps onto three structural mechanisms—carbon intensity of production, service-sector share, and economic size—with the smallest, most carbon-intensive economies bearing the largest adjustment costs. Fifth, Road Transportation and Manufacturing are the primary sectoral channels. Sixth, Anderson–Rubin inference establishes that OLS estimates are conservative lower bounds on the true causal cost, with the direction of bias confirmed by four descriptive tests supporting the exclusion restriction of the ETS instrument. These results carry direct implications for the design of the EU Green Deal and the Just Transition Mechanism. JEL Classification: C33, Q43, Q54, Q58, O44. Environmental Economics Local Projections greenhouse gas emissions economic growth EU- 27 panel data state-dependent effects country heterogeneity EU ETS Anderson– Rubin Full Text Additional Declarations The authors declare no competing interests. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. 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We analyse four gases (CO2, CO2bio, CH4, and N2O) at the aggregate EU-27 level, by country, and by IPCC activity sector. Our approach identifies the output cost of actual emission reductions—a distinct causal object from the carbonpriceeffects estimated by Metcalf and Stock (2023): a direct empirical comparison shows that price-based and quantity-based Local Projections yield opposite signs, confirming that they identify different structural parameters. Six findings emerge. First, fossil CO2 reductions carry a statistically robust negative effect on GDP, peaking at −0.10 pp per 1% reduction at a two-year horizon. Second, annual estimates for CH4 and N2O reveal consistently negative directional patterns invisible at quarterly frequency, reflecting a signal-to-noise limitation rather than genuine economic independence. Third, CO2 effects are strongly state-dependent: expansion-period costs are approximately twice as large as recession-period costs. 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