Do Monetary and Fiscal Policies Affect Territorial and Consumption-Based CO2 Emissions? Evidence from E-7 Countries

Climate change and the problems it causes have led to global action (the UN Sustainable Development Goals and the Paris Climate Change Agreement), and specific targets have been set to reduce global temperatures. Meeting the determined targets has become crucial. Therefore, evaluating the effectiveness of macroeconomic policies (monetary and fiscal) on carbon emissions becomes inevitable. This study examines the effects of monetary and fiscal policies on territorial and consumption-based CO2 emissions in E-7 countries from 1996 to 2021. The Augmented Mean Group (AMG) estimator, which accounts for cross-sectional dependency and heterogeneity, was employed. The study concludes that monetary policy exerts a statistically significant negative impact on territorial and consumption-based CO2 emissions, whereas fiscal policy has a statistically insignificant negative impact on them. A 1% increase in broad money, as an indicator of monetary policy, decreased territorial-based CO2 emissions by 0.14 and consumption-based CO2 emissions by 0.28. The results of the Dumitrescu and Hurlin causality analysis reveal a bidirectional causal relationship between monetary policy and territorial- and consumption-based CO2 emissions.