Time-Varying Impacts of Government Spending on CO2 Emissions

IMF Working Papers, July 4, 2025

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Authors: Stefano Di Bucchianico, Mario di Serio, Matteo Fragetta, Giovanni Melina
Published: July 4, 2025
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798229013772.001

A Bayesian factor-augmented interacted vector autoregression framework purified of expectations is employed to analyze how government spending shocks have impacted CO2 emissions in the United States from the 1980s to the pre-pandemic period.

Consumption-generated emissions:
- Generally rose following fiscal expansions.
- The five-year elasticity to government spending declined from about 0.5 in the early 1980s to 0.1 by 2019.
Production-generated emissions:
- Increased in the early 1980s following positive government spending shocks, with a five-year elasticity near 0.4.
- Reversed course by the 1990s, eventually reaching an elasticity of –0.5 by the end of the sample.

Time-varying interaction variables examined suggest the following can mitigate—or even reverse—the emissions growth associated with economic expansions driven by government spending:
- Environmental regulation
- Tertiarization
- A larger share of spending on public goods
Government consumption, rather than investment, is chiefly responsible for the shifts observed in emissions elasticities.

Subject: Environment, Environmental policy, Expenditure, Government consumption, Greenhouse gas emissions, National accounts, Public investment spending
Keywords: CO2 emissions, consumption-generated emission, elasticity to government spending, emission elasticity, Environmental policy, fiscal policy, Global, Government consumption, government spending, government spending shock, Greenhouse gas emissions, IMF working paper No. 25/132, Public investment spending