Effects of public and private expenditures on environmental pollution: A dynamic heterogeneous panel data analysis

Abstract

This paper examined the impact of expenditures of household, firm and government on aggregate and sectoral carbon emissions in the world economies during 1990–2015. The modified heterogeneous panel data technique was used to estimate both carbon emission and income models from which both the direct and indirect effects of expenditure categories were estimated along with long-run and short-run analyses.Empirical results indicate that, in the long-run, the negative direct effect of government expenditure was reduced by the positive indirect effects, leading to positive total effect on aggregate carbon emission. However, in the short-run, the negative direct effect was enhanced by the negative indirect effect, culminating into negative total effect. Further, in the long-run, the positive direct effect of investment expenditure was reduced by the negative indirect effects, resulting into negative total effect on aggregate carbon emissions. However, the negative short-run direct effect was reduced by the positive indirect effect leading to marginal positive total effect. The total direct effect of household consumption spending was negative in the long-run and could be relatively large in the short-run. The effect of the household expenditure on sectoral carbon emissions was negative, while that of private investment was positive, and that of public spending was diverse.The policy lessons include the need to conduct value chain environmental pollution implications of any expenditure policy.