Can monetary and fiscal policy reduce CO2 emissions? Analysis of regional country groups

Ozili, Peterson (2025): Can monetary and fiscal policy reduce CO2 emissions? Analysis of regional country groups. Forthcoming in:

Abstract

There are calls for monetary and fiscal authorities to use policy tools to support ongoing efforts to achieve the net zero emissions goal. However, limited attention has been paid to the regional differences in the relationship between monetary-fiscal policy and CO2 emissions. This study examines the impact of monetary and fiscal policy on carbon dioxide (CO2) emissions from fossil fuel energy consumption. The study extends the literature by linking monetary and fiscal policy to climate action for achieving the net zero emissions goal. In the empirical analysis, the monetary policy indicator is the lending interest rate, the fiscal policy indicator is the tax revenue to GDP ratio while CO2 emissions from fossil fuel energy consumption is the CO2 emissions indicator. The findings reveal that contractionary monetary and fiscal policy jointly reduce CO2 emissions in the regions of the Americas and Africa. Contractionary monetary and fiscal policy combined with higher renewable energy consumption jointly reduce CO2 emissions in the regions of the Americas, Asia and Europe. Also, contractionary monetary and fiscal policy combined with higher institutional quality jointly reduce CO2 emissions in African countries. Higher renewable energy consumption reduces CO2 emissions in Africa, Asia, Europe and Americas regions while strong institutional quality consistently reduce CO2 emissions in Europe and the Americas. The implication of the findings is that monetary and fiscal authorities should strengthen existing institutions, increase renewable energy consumption, and increase interest rate and taxes on the fossil fuel economy in a coordinated manner to reduce CO2 emissions from fossil fuel energy consumption.

• Item Type: MPRA Paper
• Language: English
• Keywords: CO2 emissions, monetary policy, fiscal policy, institutional policy, population, interest rate, tax revenue to GDP ratio, net zero, sustainable development, renewable energy, economic growth, Africa, Asia, Europe, Americas.
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q52 - Pollution Control Adoption and Costs ; Distributional Effects ; Employment Effects; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate ; Natural Disasters and Their Management ; Global Warming; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q56 - Environment and Development ; Environment and Trade ; Sustainability ; Environmental Accounts and Accounting ; Environmental Equity ; Population Growth; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q57 - Ecological Economics: Ecosystem Services ; Biodiversity Conservation ; Bioeconomics ; Industrial Ecology

References

Akbar, M. W., Yuelan, P., Zia, Z., & Arshad, M. I. (2022). Role of fiscal policy in energy efficiency and CO2 emission nexus: An investigation of belt and road region. Journal of Public Affairs, 22(4), e2603.

Ayompe, L. M., Davis, S. J., & Egoh, B. N. (2021). Trends and drivers of African fossil fuel CO2 emissions 1990–2017. Environmental Research Letters, 15(12), 124039.

Bartocci, A, Notarpietro A and Pisani M (2022). “Green” fiscal policy measures and non-standard monetary policy in the Euro Area. Bank of Italy Working Paper, No, 1377.

Bashir MF, Rao A, Sharif A, Ghosh S and Pan Y (2024). How do fiscal policies, energy consumption and environmental stringency impact energy transition in the G7 economies: Policy implications for the COP28. Journal of Cleaner Production, 434, 140367.

Bataille CG (2020) Physical and policy pathways to net‐zero emissions industry. Wiley Interdisciplinary Reviews: Climate Change, 11(2), e633.

Benkhodja, MT, Ma X and Razafindrabe T (2022) Build Back Better: The Role of Green Monetary and Fiscal Policies. Available at SSRN 3977541.

Bildirici M, Genç SY and Ersin ÖÖ (2023) Effects of Fiscal and Monetary Policies, Energy Consumption and Economic Growth on CO2 Emissions in the Turkish Economy: Nonlinear Bootstrapping NARDL and Nonlinear Causality Methods. Sustainability, 15(13), 10463.

Boateng, E., Annor, C. B., Amponsah, M., & Ayibor, R. E. (2024). Does FDI mitigate CO2 emissions intensity? Not when institutional quality is weak. Journal of environmental management, 354, 120386.

Canofari, P., Di Bartolomeo, G., & Messori, M. (2023). An Effective Policy Mix for the EU's Post-pandemic Challenges. Luiss School of European Political Economy. Strasbourg.

Destek, M. A., & Pata, U. K. (2023). Carbon efficiency and sustainable environment in India: impacts of structural change, renewable energy consumption, fossil fuel efficiency, urbanization, and technological innovation. Environmental Science and Pollution Research, 30(40), 92224-92237.

Deutch, J. (2020). Is net zero carbon 2050 possible? Joule, 4(11), 2237-2240.

Dikau S, Robins N and Volz U (2021) Climate-neutral central banking: How the European System of Central Banks can support the transition to net-zero. A SOAS University Policy Report.

Dong, K., Dong, X., & Jiang, Q. (2020). How renewable energy consumption lower global CO2 emissions? Evidence from countries with different income levels. The World Economy, 43(6), 1665-1698.

D’Orazio P and Popoyan L (2023) Do monetary policy mandates and financial stability governance structures matter for the adoption of climate-related financial policies?. International Economics, 173, 284-295.

Gudde P, Oakes J, Cochrane P, Caldwell N and Bury N (2021) The role of UK local government in delivering on net zero carbon commitments: You've declared a Climate Emergency, so what's the plan?. Energy Policy, 154, 112245.

Han Y, Bao M, Niu Y and ur Rehman J (2024) Driving towards net zero emissions: The role of natural resources, government debt and political stability. Resources Policy, 88, 104479.