Assessing the Environmental Impact of Fiscal Consolidation in OECD Countries: Evidence from the Panel QARDL Approach

Concerns about ensuring a sustainable environment are growing, attracting major attention from policy professionals worldwide. Therefore, this study investigates the nonlinear impacts of fiscal consolidation on CO2 emissions in 17 OECD countries from 1978 to 2020. To probe the short- and long-term connections across various quantiles of CO2 emissions, we adopted panel QARDL frameworks. The Granger non-causality test was used to investigate the variables’ association with CO2 emission. The study’s main findings confirm the overall beneficial effect of fiscal consolidation on carbon emissions. It reduces CO2 emissions at almost all quantiles in the short run. By contrast, in the long run, the effect is positive at lower quantiles and turns negative at upper quantiles. Furthermore, a causality analysis identified a bidirectional causal relationship between fiscal consolidation and CO2 emissions, confirming the existence of mutual influence. While Keynesian theory links fiscal consolidation to economic recession, our findings support the non-Keynesian view, showing that such policy can foster economic growth and thereby contribute to reducing CO2 emissions in the short run. Thus, OECD countries are orienting public spending and carbon taxation toward environmentally friendly practices while ensuring environmental protection and deficit reduction. Nonetheless, the identified mixed effect in the long run highlights the need for sustained consolidation policies by enhancing expenditure efficiency and adopting targeted taxation measures to achieve lasting emission reductions and support the transition to cleaner energy, even when emissions are relatively low.