On the interaction between fiscal policy and CO₂ emissions in G7 countries: 1875–2016

ABSTRACT

This study examines the impact of fiscal policy and economic growth on CO₂ emissions employing a bootstrap causality test in the frequency domain. Analysing a long time series of data from 1875 to 2016 for G7 countries, we mainly aim to investigate the validity of the environmental Kuznets curve (EKC) hypothesis and whether fiscal policy affects the environment. The findings of causality from government expenditures to CO₂ emissions are time-varying. However, the causality from economic growth to CO₂ emissions follows a stable path and does not change over time in all countries except Canada. Since causal relations follow a consistent line and do not confirm an inverted U-shaped relationship between economic growth and environmental pollution, the EKC hypothesis does not hold in the G7 countries, implying that environmental problems are not automatically solved. The results also suggest that fiscal policy can contribute to climate change mitigation at different points in time.

KEYWORDS:

• Economic growth
• frequency domain
• government expenditures
• CO₂ emissions
• time-varying causality

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

The datasets analysed during the current study are available from the corresponding author on reasonable request.

Notes

1 Since Germany’s GEX data began in 1950, we test the null hypothesis of causality for the CO₂-GEX relationship over the period 1950–2016 for Germany.