Fiscal and Monetary Policy, Energy Consumption, and CO2 Emissions: Unveiling the Green Impact of Liberalization in Pakistan

Abstract

Objective: The paramount aim of this study was to determine the influence of fiscal policy, monetary policy, and energy consumption on CO2 emissions in Pakistan before and after liberalization.

Research Gap: None of the earlier studies to date have been organized to examine the influence of contractionary and expansionary fiscal and monetary policies, along with energy consumption and trade liberalization, on carbon emissions in Pakistan. This study contributes to the literature by determining the influence of fiscal policy, monetary policy, and energy consumption on CO2 emissions with reference to liberalization in Pakistan.

Design/Methodology/Approach: This study utilizes the correlated component regression methodology, which is more suitable for multicollinear data sets.

The Main Findings: Our findings illustrate that contractionary fiscal and monetary policies have an inverse influence on CO2 emissions during the pre-liberalization, with the former being insignificant and the latter significant. In the pre-liberalization period, expansionary fiscal policy has a significant and positive influence on carbon emissions, whereas expansionary monetary policy affects carbon emissions positively but insignificantly. In the post-liberalization period, both contractionary fiscal and monetary policies have a negative effect on CO2 emissions, while expansionary fiscal and monetary policies positively affect CO2 emissions. Electricity, oil, and coal consumption also have a positive influence on CO2 emissions during the pre- and post-liberalization periods, whereas the effect of natural gas consumption on carbon emissions is positive only in the pre-liberalization.

Theoretical / Practical Implications of the Findings: Based on our findings, the government should raise environment-related expenditures through expansionary fiscal and monetary policies to achieve fair and sustainable economies with low carbon emissions. The expansionary fiscal policy would be focused on green budgeting with special emphasis on environmental protection, targeting renewable energy, and promoting green infrastructure in manufacturing.