The economic cost of environmental laws: Volatility transmission mechanism and remedies

Abstract

Since the last three decades, the world has faced many changes that exhibit significant influence on natural resources, environmental laws, and the economic performance of various countries and regions. As the most developed country in the World, any policy adaptation of implementation in the US could influence the policies of other countries and regions. However, several factors could affect the country's economic performance, yet unexplored empirically, but are important from policy perspectives, which motivates this study. Therefore, the current study investigates the US's environmental laws, natural resource volatility, and economic performance from 1990 to 2020. The study used a novel wavelet methodology that considers wavelet power spectrum and wavelet coherence and provides short- and long-run estimates. The empirical results of the wavelet power spectrum reveal that environmental policy stringency and natural resource rents (total natural resource rents, natural gas rents, oil rents) are vulnerable in the selected time period. Additionally, the wavelet coherence empirically reports that there is a bidirectional causal association between environmental policy stringency, total natural resource rents, oil rents, and economic performance. In the short-run, the causality has been observed from these variables to economic performance, while from economic performance to these variables in the long run. Moreover, a unidirectional causal association runs from economic performance to natural gas rents. This study recommends strengthening environmental policy stringency and natural resources hedging to encourage economic performance and environmental sustainability.