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

Peterson Ozili

MPRA Paper from University Library of Munich, Germany

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.

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. (search for similar items in EconPapers)
JEL-codes: E31 E52 Q52 Q54 Q56 Q57 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-ene, nep-env, nep-mon and nep-sea
References: View references in EconPapers View complete reference list from CitEc
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:124261

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