Analysing the impact of oil prices, economic activity, and trade policy uncertainty on CO2 emissions in the US context: A wavelet approach

Abstract

This study examines the simultaneous co-movements between oil prices, economic activity, trade policy uncertainty, and CO₂ emissions in the United States using a series of wavelet methodologies. Unlike traditional approaches, the wavelet approach is appropriate for understanding the time-varying associations at different frequencies and is designed to efficiently handle the non-stationary nature of economic and environmental time series data. The empirical results highlight the potential of a leading relationship where economic activities and trade policy uncertainties drive CO₂ emissions in the US during the period from January 1990 to January 2022. Contrarily, the link between oil prices and CO₂ emissions is characterized by intricate dynamics, exhibiting both lagging and leading co-movements at different frequencies. Moreover, economic activities have a positive impact on CO₂ emissions, while in the high quantile tails, trade policy uncertainty decreases CO₂ emissions. This means economic activity is slowing down during the period of high trade policy uncertainty. Our findings highlight the necessity of specific policies that reconcile economic growth with environmental sustainability, manage the effect of oil price changes on CO₂ emissions, and match trade policies with emission-minimizing goals. Based on the results, this research offers important implications for policymakers to ensure the equilibrium between economic activity and environmental management within the scope of sustainable development goals.