Fiscal policy and CO2 emissions from heterogeneous fuel sources in Thailand: Evidence from multiple structural breaks cointegration test

Abstract

This study investigated the dynamic linkage between fiscal policy, energy and CO2 emissions from heterogeneous fossil fuel sources in the context of the environmental Kuznets curve (EKC) framework for Thailand. With annual data from 1972 to 2014 while incorporating structural breaks, the study employed a Maki cointegration test and the dynamic ordinary least squares estimation approach. The results found that a 1% increase in fiscal policy brought about a 6.5% (p < 0.05) increase in the low CO2 emitting gaseous fuel sources (natural gas), a 0.2% (p < 0.01) reduction in the intermediate CO2 emitting liquid fuel sources (crude oil derivatives), and an insignificant increase 0.2% (p > 0.05) in the high CO2 emitting solid fuel sources (coal derivatives). While a 1% increase in fiscal policy abates aggregated CO2 emissions by 0.2% (p < 0.05), the existence of the EKC hypothesis was validated in all models. The causality test revealed a bi-directional causal relationship between fiscal policy and CO2 emissions and unidirectional flow from fiscal policy to energy consumption. This confirms that fiscal policy initiatives towards energy consumption have long-run implications for environmental quality. Our findings support the energy-led growth hypothesis for the Thai economy. The implication of the finding is that increasing the share of clean and renewable energy sources should be encouraged—rather than energy conservation policies, which obstruct energy supply and utilization. This highlights a more efficient way of harnessing energy sources through the instrumentality of fiscal policy.