Fiscal Policy and CO2 Emissions: A Disaggregated Analysis of the Transmission Channels and the Complementarity Between Taxation and Spending Policies

This paper examines the role of fiscal policy in shaping CO2 emissions for a sample of 23 countries, including the Euro Area, the United States, Canada, and China, over the period 2000–2023. The analysis moves beyond aggregate fiscal measures to identify taxes and expenditure categories contributing most to reduce CO2 emissions. We investigate the transmission channels through which fiscal policy affects environmental outcomes and address potential non-linear fiscal effects. The study also highlights the critical role of recycling fiscal resources toward environmentally relevant expenditures. The System GMM results suggest that some market-based mechanisms and targeted public expenditure contribute to reducing CO2 emissions, while other fiscal tools exhibit opposite or context-dependent effects. A non-linear relationship is detected for compliance emissions. Moreover, results reveal that supply-side and demand-side transmission channels generate contrasting effects on emissions. Finally, the effectiveness of environmental fiscal policies is shown to depend critically on the pattern of fiscal revenue recycling. These results provide important insights for the design of effective fiscal strategies aiming to achieve climate objectives.