Climate-based fiscal and monetary policies for low-carbon growth in Nigeria

Introduction The average global temperature has increased by approximately 1 °C above pre-industrial levels and is projected to rise by about 0.2 °C per decade due to increasing greenhouse gas emissions. This development has intensified concerns about the compatibility of climate mitigation policies with sustained economic growth. Against this background, this study investigates whether climate-responsive fiscal and monetary policies can complement and accelerate decarbonization efforts while maintaining macroeconomic stability and economic growth in Nigeria. Methods The study employs an environmental Dynamic Stochastic General Equilibrium (DSGE) model estimated for the Nigerian economy to analyze the economic and environmental effects of climate-based macroeconomic policies. The model examines the responses of key macroeconomic aggregates to unexpected policy shocks and evaluates the effects of an anticipated carbon tax. It further analyses the volatility implications of implicit and explicit climate-based monetary policy regimes, investigates the combined effects of multiple climate-based policy instruments, and explores optimal policy design under a Ramsey planner framework. Results The findings show that an unexpected carbon tax is recessionary, whereas green subsidies and green relending policies are expansionary, with all three instruments contributing effectively to climate mitigation. An anticipated carbon tax performs less favorably than its unanticipated counterpart. The results further indicate that an implicit green monetary policy regime, characterized by a non-standard Taylor rule with climate targets, exhibits stronger decarbonization and inflation-stabilization properties than an explicit regime combining a standard Taylor rule with green credit policies. In addition, simultaneous implementation of climate-based policy instruments positively affects economic activity, although effective environmental outcomes depend on proper sequencing and timing. The study also finds evidence of improved resource reallocation from the brown sector to the green sector under a Ramsey planner implementing climate-based macroeconomic policies. Discussion and conclusion The study concludes that climate-responsive fiscal and monetary policies can simultaneously stimulate economic output and reduce carbon emissions in Nigeria. The findings highlight the importance of coordinated and optimally designed climate-based macroeconomic policies in achieving sustainable growth and environmental objectives. Appropriate sequencing and integration of policy instruments are essential for maximizing both economic and environmental benefits.