Production technology and carbon emission: Long-run relation with short-run dynamics

Dinda, Soumyananda Article Production technology and carbon emission: Long-run relation with short-run dynamics Journal of Applied Economics Provided in Cooperation with: University of CEMA, Buenos Aires Suggested Citation: Dinda, Soumyananda (2018) : Production technology and carbon emission: Long-run relation with short-run dynamics, Journal of Applied Economics, ISSN 1667-6726, Taylor & Francis, Abingdon, Vol. 21, Iss. 1, pp. 106-121, https://doi.org/10.1080/15140326.2018.1526871 This Version is available at: https://hdl.handle.net/10419/314042 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Journal of Applied Economics ISSN: 1514-0326 (Print) 1667-6726 (Online) Journal homepage: www.tandfonline.com/journals/recs20 Production technology and carbon emission: long-run relation with short-run dynamics Soumyananda Dinda To cite this article: Soumyananda Dinda (2018) Production technology and carbon emission: long-run relation with short-run dynamics, Journal of Applied Economics, 21:1, 106-121, DOI: 10.1080/15140326.2018.1526871 To link to this article: https://doi.org/10.1080/15140326.2018.1526871 © 2018 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group Published online: 28 Nov 2018. Submit your article to this journal Article views: 3739 View related articles View Crossmark data Citing articles: 36 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=recs20 Production technology and carbon emission: long-run relation with short-run dynamics Soumyananda Dinda Department of Economics, University of Burdwan, Burdwan, India ABSTRACT Using a vector error correction model, this paper investigates the long-run relation with short-run dynamics among CO 2 emission, technological progress and economic growth. It observes a specific kind of causality running from technological progress to reduction of CO 2 emission in the United States during 1963–2010, while past income generation is the cause of rising carbon emission. Policy makers should emphasise R&D for updated production technology, while raising income helps to reduce CO 2 emission. Technological progress is the central force that causes income growth as well as emissions’reduction. Continuous change and adaption of new and updated technology is the main driving force towards sustainable development. ARTICLE HISTORY Received 29 August 2016 Accepted 1 September 2017 KEYWORDS CO 2 emission; economic growth; patent; technological progress 1. Introduction The linkage between climate change and economic growth is an important issue in recent research; however, there is not much focus on the relationship between technological progress and climate change or carbon emission. Carbon dioxide (CO 2 )emissionisthe main culprit of global climate change (Coondoo & Dinda, 2002). Carbon emission rises over the years while the number of patent registration also increases in a developed country like the United States. Now, questions arise about the relationship between patent registration and carbon emission, or the relationship between climate change and technological progress. 1 Several studies (Coondoo & Dinda, 2002; Dinda & Coondoo, 2006;Stern,2000; Yang, 2000) observe the causal linkage between economic growth and carbon emission (or energy consumption). Applying econometric tools, this study investigates the relation among technological progress, economic growth and CO 2 emission. Let us consider a specific level of income, up to which one may reasonably expect high greenhouse gas-intensive income growth to affect adversely the climate; but beyond a certain critical level, climatic degradation may reach a stage where further income growth becomes impossible. Thus, climate change is a global public good that may act as a constraint to income growth at this later stage if greenhouse gas-intensive income growth process is continued (Dinda, 2009a; Holtz-Eakin & Selden, 1995; CONTACT Soumyananda Dinda [email protected] Department of Economics, University of Burdwan, Golapbag Campus, Burdwan, West Bengal 713104, India I am also grateful to the Editor of the JAE for valuable suggestions. 1 Patent registration is considered as the proxy of technology and its change over time is the technological progress. JOURNAL OF APPLIED ECONOMICS 2018, VOL. 21, NO. 1, 106–121 https://doi.org/10.1080/15140326.2018.1526871 © 2018 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. Schmalensee, Stoker, & Judson, 1998; World Bank, 1992). The global economy faces serious challenges from the global climate change. To overcome it, there is international pressure to reduce carbon emission for all nations. This study investigates technological progress and its linkage with CO 2 emission, which is a crucial factor of global climate change. It focuses on production technology and its progress which is observed in number of granted utility patents over time. 2 These patents improve production processes. Generally, technological progress 3 results in a greater efficiency in the use of energy and materials. Truly, upgraded technology improves with economic growth and helps to produce certain amount of goods using less energy and materials, which definitely reduce pressure or burden on natural resources and environment successively. There is a growing trend among industries to reconsider their production processes and thereby take environmental consequences of production into account. Lindmark (2002) observes that the technological change associated with the production process may also result in changes of the input mix of materials and fuels. Ultimately energy requirement per unit of output will be less for new production technology. Any improvement in production system through certain change in technology, redesign product or/and production process helps to save energy and reduce emission. 4 Intuitively, technological progress is one of the main causes of reduction of carbon emission (Dinda, 2009b). Does technological progress move in the right direction towards the low carbon emission associated with economic growth? A careful study is necessary to understand the causal linkage between technological progress, income and carbon emissions. It certainly helps to formulate proper policy for mitigating climate change of a country and the world. In this context, this study focuses on the United States, a developed economy, where number of patent registration (both design and utility patent) is very high over several decades. So, logically the United States should be the least polluter in the world, but in contrast, the United States is on the top of carbon emitters list. 5 Why is the United States on the top polluters list while it holds the major patents of innovations or upgraded technology? Does the rising innovation reduce fossil-fuel consumption and thereby carbon emission? This paper attempts to answer these questions with a possible theoretical explanation and empirical evidence. 2 Number of utility patents granted in the US Patent and Trademark Office (USPTO) is taken, here, as a proxy of technology for given year. Over time, it represents technological progress. Several studies also used USPTO data; see Cao (2014), Hall et al. (2001), and Griliches (1998). 3 Technological progress may also play a major role in this process of transformation to a cleaner environment by accelerating economic growth and at the same time by helping in the substitution of dirty and obsolete technologies by cleaner ones. This is the so-called technique effect of economic growth (see Dinda, 2004; Stern, 2004). The goal of cleaner and upgraded technology is to reduce emissions or pollutants. Applications of these technologies definitely generate less emission and decline the emission level, “clean coal technologies”like PFBC, which initial goal was to reduce emission of particulates and acidification. Another example is that catalytic converters for cars decrease emissions that affect the local environment and turn it into other emissions such as CO 2 emission. This study focuses on CO 2 emission only. 4 Energy saving technology reduces fossil-fuel consumption and thereby less carbon emissions. Sometimes, an external shock may also force the structure of the economy to change. For example, oil shocks of the 1970s have caused an enormous structural economic transition world over towards environment-friendly technology that helped to reduce emission (Moomaw & Unruh, 1997; Unruh & Moomaw, 1998). 5 China and the United States are in the top list of total carbon emission. China and the United States hold first and second position in CO 2 emission in the world, respectively. For details, see the Carbon Dioxide Information Analysis Center (CDIAC) of Oak Ridge National Laboratory (ORNL), the United States. JOURNAL OF APPLIED ECONOMICS 107 The paper is organised as follows: Section 2 highlights the related literature and discusses on technological progress focusing on utility patent. Section 3 provides a simple theoretical background following Dinda (2009b), which shows how production technologies help to reduce pollution in a growing economy. Section 4 describes the data and the empirical methodology. Section 5 analyses the results, and Section 6 concludes. 2. Literature review 2.1. Related literature Several socio-economic factors (including consumers’choices) are responsible for improving environmental quality (Gawande, Bohara, Berrens, & Wang, 2000,2001; Lopez & Mitra, 2000; Lieb, 2002; McConnel, 1997; Rothman, 1998); however, environmental quality improves also with technological progress (Andreoni & Levinson, 2001; Brock & Taylor, 2010; Dinda, 2004; Grossman & Krueger, 1995; Komen, Gerking, & Folmer, 1997). Loschel (2002) provides an overview of the treatment of technological change in economic models of environmental policy. The assessment of climate change mitigation policies through economic modelling depends crucially on assumptions under which technological change has been incorporated in the model (Loschel & Schymura, 2013). Earlier economics modelling are heavily relied on the assumption of exogenous technological change, which is also a function of time. Although many problems associated with modelling of exogenous technological change have been resolved, numerous questions still remain unanswered. Few energy–economy–environment models consider technological change as endogenous, responding to socio-economic variables. Loschel (2002) points out to three main elements in models of technological innovation: (1) investment in R&D, (2) spillovers from R&D and (3) technology learning, or learning-by-doing. Technological change is an uncertain phenomenon. These uncertainties have to be incorporated in large-scale models more carefully. Another important dimension of technical change is the potential for path-dependency, inertias and lock-in situations. Energy–economy models can account for such effects by a careful inclusion of learning-by-doing, time lags, assumptions about the diffusion rates of innovations and directed (or biased) technological change (Cao, 2014; Griliches 1998; Hafner, 2005; Hall, Jaffe, & Trajtenberg, 2001; Loschel & Schymura, 2013). There are two major trends in the literature –one focuses on shifting the use of production technologies which is different from their production intensity (Stokey, 1998) and other analyses the characteristics of the abatement technology (John & Pecchenino, 1994; Selden & Song, 1995). Brock and Taylor (2010) provide a Green Solow model that includes emission, abatement and stock of pollution. Andersson and Karpestam (2013) demonstrate that the economic growth promotes a reduction of energy and carbon emissions. They analyse the short-term and long-term determinants of energy intensity, carbon intensity and scale effects for eight developed and two emerging economies from 1973 to 2007. A detailed literature survey on energy–growth nexus can be found in the study of Ozturk (2010). Brunnermeier and Cohen (2003) identify the determinants of 108 S. DINDA environmental innovation in the US manufacturing industries. Using a panel of 127 manufacturing industries over the period 1989–2004, Carrion-Flores and Innes (2010) study the potential bidirectional causal links between environmental innovation and toxic air pollution and find that environmental innovation is an important driver of reductions in US toxic emissions. Levinson (2009) observes that the US manufacturing sector air pollutants (such as SO 2 ,NO 2 , CO and VOC) declined with technological advancement during 1987–2001. Several studies (Apergis & Payne, 2009; Burns, Gross, & Stern, 2013; Cheng, 1996,1999; Cheng & Lai, 1997; Coondoo & Dinda, 2002; Dagher & Yacoubian, 2012; Kalimeris, Richardson, & Bittas, 2014; Stern, 2000; Yang, 2000) examine the causal relationship between income and energy consumption (emission), but few (Ausubel, 1995) investigate the causality between technological progress and carbon emission. This paper mainly focuses on the long-run equilibrium relationship among CO 2 emission, income and technological progress with their short-run dynamics in a developed economy like the United States. 2.2. Technological progress Technological progress is possible through innovations, which are protected by patent rights. Patents are important legal documents, issued by an authorised government agent, granting the right to exclude anyone else from the production or use of a specific new device or process for defined number of years. They are issued, generally, to the inventor of the device or process after a thorough examination focusing “on both the novelty of the claimed item and its potential utility”(Griliches, 1990). As stated in Griliches (1990): “The right embedded in the patent can be assigned by the inventor to somebody else, usually to his employer, a corporation, and/or sold to or licensed for use by somebody else”. The main purpose of the patent system is “to encourage invention and technical progress both by providing a temporary monopoly for the inventor and by forcing the early disclosure of the information necessary for the production of this item or the operation of the new process”(Griliches, 1990). Thus, patent registration is considered as a proxy for innovation and it provides country’s technological capabilities (Archibugi & Coco, 2004,2005; Griliches, 1990, 1998; Lall, 1992). So, the patent registration of a country shows the trend in the improvement of technological strength (Tong and Frame 1994). This study mainly concentrates on technological strength of a nation. This paper considers the utility patent (UTPAT) as a proxy of production technology, 6 which is the main concern of carbon emission in the production process. Market ambitions are the prime mover for new innovations in a matured capitalistic economy (Lall, 1992). Technological progress is captured in terms of utility patents which must be reflected with less pollution in the efficient production process. As number of patent on production innovation increases, the energy consumption or carbon emission may reduce. Thus, this paper tries to argue that growing utility patent might be the cause 6 Patent registration is considered as a proxy for technological innovation and it also reflects the country’s technological capabilities (Archibugi & Coco, 2004; Griliches, 1990; Lall, 1992). Both utility and design patent are registered. However, utility patent is considered a general indicator for technological progress related to carbon-reducing technologies. In this context, utility patent is more appropriate compare to design patent. JOURNAL OF APPLIED ECONOMICS 109 of reduction of carbon emission. This is important to tackle the global climate change with appropriate policy and formulate strategy for economic development with R&D. 3. Theoretical background 3.1. Production function, pollution and clean technology Following Solow (1956)and Dinda (2009b), considering one-good economy, output is produced by only composite capital, k, for given technology. Production function of this economy (intensive form) is y¼fðkÞ;fk>0and fkk <0 (1) The production of the economy, y, depends only on composite capital k, which also generates pollution as a by-product and fis the technology in this system. Pollution is unavoidable and it has an inherent relation with the production process. Only technological improvements eliminate pollution. Pollution per unit output (μ) may be a decreasing (increasing) function of technological improvement. For simplicity, initially this paper assumes a constant μ. Pollution is generated directly with production but inversely with available cleaner technology. The pollution flow at each moment is proportional to output production and inverse to the technological availabilities, i.e., p¼μy A;0<μ<1 (2) where pis the pollution and Ais the number of available clean technologies in the economy. A higher value of Asuggests more available clean technology (Dinda, 2009b; Reis, 2001) in the economy. A lower value of Asuggests a limited choice set, whereas higher value of Aprovides greater choice set with more alternatives and free to choose better and/or cleaner technologies. The choice of technology depends on its availability and accessibility for all. The basic assumption is that an upgraded production technological innovation (in terms of either productivity or energy efficiency) is considered a cleaner technology. It suggests that any production innovation increases output for given inputs. So, per capita output requires less input. With production technological innovations, the input–output ratio decreases and consequently pressure on environment reduces. Pollution is generated directly with production for a given technology at a given time. However, over time, a nation moves towards more and more clean technology through continuous upgrade or/and innovation. Clean technology also changes over time. The innovation outcome depends on the R&D expenditure, physical and human capital. Thus, stock of capital and technological progress jointly determine pollution, p, in long run. 7 Taking log of Equation (2), the long-run relation is ln p¼ln μþln yln A(3) 7 According to Andreoni and Levinson (2001), increasing return to scale operates in the abatement technology and reduces pollution. 110 S. DINDA 3.2. Steady state The steady-state relationship between the growth rate of pollution, income and technology is derived from Equation (3) (differentiating with respect to time), i.e., _ p p¼ _ y y _ A A(4) Equation (4) suggests that technological progress definitely reduces the pollution growth rate. When pollution per unit output (μ) may change over time as μ¼μ0eθt(5) where μ0(>0) is the initial value, and its growth rate, θ(θ0;or; hi 0), is a constant and tis time variable, then ln μ¼ln μ0þθt(6) Now plugging Equation (6) into (3), we get ln p¼ln μ0þθtþln yln A(7) and corresponding steady-state relationship will be _ p p¼θþ _ y y _ A A(8) Theoretically, θshould be negative and pollution declines over time. Equation (8) suggests that pollution’s growth rate ( _ p p) increases with economic growth rate ( _ y y), but technological progress ( _ A A) in production process reduces pollution in long run. In this context, we verify its empirical validity using a country specific data. 4. Empirical strategy 4.1. Data sources Utility patent (UTPAT) is considered as a proxy of a production technology that is supposed to reduce carbon emission. In this study, it is measured as the number of utility patents granted per year. Time series data on UTPAT for the period 1963–2013 are taken from the US patent and trademark office (USPATO) website. The corresponding annual time series data on per capita CO 2 emission 8 (PCCO 2 ) (express in metric tons) for the period 1961−2010 are obtained from Carbon Dioxide Information Analysis Center 9 (CDIAC), the United States; and per capita GDP 8 Here, we consider CO 2 emission as proxy of pollution. Truly, pollution and CO 2 emission is far from equal, or there is a difference between emission and pollution. Emission is one part of pollution. Emission is a flow and affects local environment only, while concentration of CO 2 emission is the stock that accumulate over time and affect the local as well as the global environment. Measurement of CO 2 emission is comparatively easier than that of concentration of CO 2 , and widely the CO 2 emission data are available, but less CO 2 concentration data. Moreover, CO 2 emission is one of the greenhouse gases, but it is the most important at the global level. 9 This carbon dioxide emission data generate from manufacturing industry, which is appropriate for this study. See Oak Ridge National Laboratory (ORNL) of the United States, http://www.cdiac.ornl.gov. JOURNAL OF APPLIED ECONOMICS 111 (PCGDP) are taken from the World Bank (at constant price 2005). CO 2 emission per dollar (CO 2 per dollar) is calculated for the period of 1961–2010. Combining these data sets together, we compile time series data set of the United States during 1963–2010. Fossil-fuel carbon emission generated by the United States has been increasing continuously over the long past several decades (see Figure A1), while at the same time, the number of utility patents has been increasing rapidly (see Panel a in Figure 1). During 1963–2010, per capita carbon emission emitted by the United States increased yearly 0.22% and per dollar carbon emission declined by 1.85%, while the granted utility patent grew 3.27%. Figure 1 shows the rising trends of utility patent and per capita CO 2 emission, while per dollar CO 2 emission is continuously declining. It shows clear evidence that per capita CO 2 emission has been increasing (or at least non-declining) over several decades, whereas CO 2 emission per dollar is steadily falling. During the period, utility patents continuously increase. The preliminary observation is that there is an association between utility patent and CO 2 emission per dollar over time. 4.2. Methodology We have to examine weather data are stationary or non-stationary and apply appropriate econometric techniques for data analysis. Variables are non-stationary if they have a unit root. Here, we apply the augmented Dickey–Fuller (ADF) and Phillips– Perron (PP) unit root test. In case of two or more non-stationary variables, there is a possibility of cointegrating relation among them. Cointegration tests are required when all variables are integrated of order one, i.e., I(1). Hence, if needed, we examine the cointegration (Johansen, 1988). Engle and Granger (1987) show that if two series are I(1), then Granger causality may exist in at least one direction in I(0) variables. According to Engle and Granger (1987), cointegration shows the long-run equilibrium relationship among variables and short-run dynamics. For short-run relation, vector autoregressive model is constructed in terms of their first differences. In case, two series are I(1); VAR with error correction term is the vector error correction model (VECM), which captures short-run dynamics with the long-run equilibrium relation. VECM is a statistical technique that helps to detect the nature of relationship in long-run and short-run dynamics among variables in a time series data set. 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