The Impact of Oil Prices on Carbon Dioxide Emission Levels in Sweden : a time-series regression analysis of Sweden

Abstract: Globally, CO2 emissions have increased over the last decades. This trend has been broken in Sweden, where CO2 emissions are declining. Oil is one of Sweden's largest sources of energy, accounting for over 20 % of all energy consumption, and oil combustion is a large source of CO2 emissions. This paper aims to answer the question, “How have oil prices impacted carbon dioxide emissions in Sweden?” which is relevant for policy-making regarding emission reduction, as it can explain how effective economic instruments are in reducing CO2 emissions from oil. The study is conducted by setting up a Multiple Linear Regression Model where the correlational effects of oil prices on CO2 emissions are studied, as well as the effects of control variables. Sweden is the only country studied, between 1980 and 2021, by looking at monthly data. The effects of the oil price increases were lagged to see the effects in different months after the price increase. The results were that oil price increases lead to an immediate increase in CO2 emissions while decreasing after a more extended time. The direct effects of an oil price increase suggest that increases in oil price increase CO2 emissions by 0.179 kg per capita and month, which according to economic theory is inaccurate. In the longer time frame, CO2 emissions were shown to be reduced by between 0.24 to 0.42 kg per capita depending on the time after the price increase. However, because of possible biases and endogeneity occurring in this study, the results will explain the correlation between oil prices and CO2 emissions, and not the cause-and-effect relationship. There is therefore no proof of causality in this study. Previous research has suggested that oil demand is inelastic, meaning demand does not change much due to price changes. Here, the opposite is proven since significant effects are found from price changes in oil. These results are important for how policies should be introduced in the future since it found that oil price increases are effective in the long run for reducing emissions. Future studies should include other EU countries if tariffs are to be imposed, and it could also be a good idea to look at a longer time frame and lag the oil price for all months. Instrumental variable regression could also be conducted to get more reliable and unbiased estimators.