How do fiscal policy, technological innovation, and economic openness expedite environmental sustainability?

Abstract

The existing knowledge has largely overlooked the debate of whether governmental intervention limits or promotes environmental sustainability tendencies of production and consumption processes in response to economic openness. To fill this void, we aim to explore the effectiveness of fiscal policy instruments (tax revenue and government expenditure) in moderating the influence of economic openness on electricity productivity and greenhouse gas productivity by considering the Group of Seven (G7) countries as an investigative laboratory over the period 1990–2019 in the presence of technological innovation and other covariates. Developing on a Stochastic Impacts by Regression on Population, Affluence, and Technology framework, we employed a novel panel Method of Moments Quantile Regression. We found that economic openness contributed significantly to a reduction in environmental quality. Tax revenues-based fiscal contraction proved an important yardstick in mitigating climate change, especially across above-average electricity/ greenhouse gas productivity G7 countries. Nevertheless, government expenditures-based fiscal expansion significantly inhibited environmental sustainability. Concerning the indirect effects of fiscal policy, expanded taxation successfully mitigates the adverse environmental effects of economic openness; nevertheless, government expenditure promotes environmental adversities. Moreover, technological innovation promoted environmental sustainability, particularly across countries with medium and lower levels of electricity/greenhouse gas productivity. Among control variables, while the human development index remained supportive of environmental sustainability, the education index impeded electricity/ greenhouse gas productivity. The present study estimates alternative models by accommodating carbon productivity as an indicator of environmental sustainability, asserting the robustness of our baseline outcomes. According to our findings, we suggest that the fiscal financing of G7 countries should be directed to enhance the demand for domestic and imported environmentally friendly products that will cause a decline in consumption-based anthropogenic emissions of economic openness. Additionally, to meet the targets of Sustainable Development Goals (SDGs), including the mitigation of climate change and access to sustainable energy, fiscal financing should be redirected from entrepreneurs aiding in environmental degradation to eco-friendly ventures.