Assessing the impact of sustainable fiscal policy on ecological footprint: Is the Environmental Laffer Curve valid?

Purpose The present study evaluates the sustainable fiscal policy, specifically applied to environmental taxes and their influence on the ecological footprint of Japan. Additionally, the study takes into account economic growth and energy consumption. Design/methodology/approach Using the Autoregressive Distributed Lag (ARDL) model, along with Dynamic Ordinary Least Squares (DOLS) as a robustness method within the time frame of 1995–2022, the existence of a cointegration and a long-term and short-term impact of sustainable fiscal policy, energy consumption, and economic growth on ecological footprint are validated. Findings Empirical analysis demonstrates the existence of a long-run relationship among sustainable fiscal policy, energy consumption, economic growth, and ecological footprint. The finding of an inverted N-shaped relationship between sustainable fiscal policy and ecological footprint suggests the existence of an Environmental Laffer Curve (ELC). In both the short run and the long run, energy consumption leads to greater ecological footprints. Correspondingly, economic growth is in line with the Environmental Kuznets Curve (EKC), showing that environmental degradation will first increase and then decrease over the long term. Practical implications It is important for policymakers to apply a gradual technique. At the first stage, the imposition of environmental taxes accompanied by investments in green infrastructure, tax reductions, and education programs can instantly lessen the ecological footprint. Eventually, the relaxing of fiscal tightness coupled with the support of private sector innovation and circular economy practices can hold the environmental benefits. Furthermore, energy conservation policies, the spread of renewable energy technologies, carbon pricing, and demand-side management are suggested to reduce the environmental effects associated with energy use. The economic policies should combine the use of regulatory and market-based instruments that are backed by awareness campaigns and international collaboration in order to foster sustainable development. Originality/value The study presents novel revelations about the non-linear impacts of Japan’s sustainable fiscal policy on its ecological footprint, thus demonstrating the existence of an ELC and also suggesting practical ways to have a better environment and economy. Graphical Abstract Highlights