The effect of government investments on the environment: An empirical investigation of OECD countries

Abstract

Sustainable development and climate change mitigation have become key priorities of economic policy. These priorities also remain relevant in the government investments. However, theoretical approaches indicate that government investments have both favourable and detrimental effects on environmental quality. Besides, the current literature has dealt with the impact of government expenditures in general. Based on this theoretical foundation and literature motivation this study addresses the impact of government investments on carbon emissions, in the case of 38 Organisation for Economic Co-operation and Development countries. For this purpose, in the models estimated for 2 different indicators of carbon emission, besides the lagged carbon emissions, income level, industrial production, energy intensity and renewable energy variables, government investments were also included into the analysis as additional explanatory variable. Considering the dynamic nature of our model, we implemented the system generalized method of moments on panel data and the findings of all different estimates demonstrate that government investments increase environmental pollution. Furthermore, our findings indicate that the path dependence of carbon emissions is strong and point to the carbon-mitigating effect of income level and renewables, and the carbon-increasing effect of industrial production and energy intensity. Our results support the pro-market view on the environmental impact of government investments and point to environmental efficiency problems arising from the decision-making processes of government investments. Furthermore, our results are not in favor of the opinion that government investments are decided based on social costs and social benefits, including externalities, and therefore have a long-term sustainability perspective.