Assessing the influence of fiscal and monetary policies on carbon dioxide emissions

• Published in: Latin American journal of central banking 2024-09, Vol.5 (3), p.100114, Article 100114
• Main Authors: Ramlogan, Avinash, Nelson, Andell
• Format: Article
• Language: English
• Subjects: Carbon dioxide emissions; Cointegration; E21; E43; E63; Energy consumption; Fiscal policy; Monetary policy; NARDL methodology; Q53; Q54; Q56
• ISSN: 2666-1438; 2666-1438
• DOI: 10.1016/j.latcb.2023.100114

•Expansionary and contractionary fiscal policy affects CO2 emissions in the short and long run. This implies that fiscal policy is not oriented toward reducing CO2 emissions and some policy actions risk impacting domestic economic activity.•Expansionary and contractionary monetary policy also impacts CO2 emissions in the short and long run. However, based on our models, the measurement of the monetary policy stance and conditions can shed light on its impact on emissions, and is an area for deeper analysis. The finding contributes to the literature on the potential effects of monetary policy on emissions.•The impact of fossil fuel energy consumption, carbon intensity and import capacity on CO2 emissions are positive and statistically significant. A key finding is that their impact on CO2 emissions is greater in the long run than in the short run. This paper examines the impact of fiscal and monetary policies on carbon dioxide emissions in Trinidad and Tobago, using data from 1970 to 2020. We use a fiscal policy index based on government revenue and expenditure, a monetary policy index based on interest rates and reserve requirement data, and a Non-linear Autoregressive Distributed Lag technique. Our results show that expansionary fiscal policy raises emissions, while contractionary fiscal policy reduces emissions. Intriguingly, expansionary monetary policy increases emissions, while contractionary monetary policy lowers them. These findings hold significance for fiscal and monetary policymakers working on climate change mitigation strategies.