Time-varying impacts of government spending on CO2 emissions

A Bayesian factor-augmented interacted vector autoregression framework purified of expectations is employed to analyze how government spending shocks have impacted CO 2 emissions in the United States from the 1980s to the pre-pandemic period. Consumption-generated emissions are found to have generally risen following fiscal expansions, although their elasticity to government spending has declined substantially over time—with the five-year elasticity dropping from about 0.6 in the early 1980s to around zero by 2019. In contrast, positive government spending shocks increased production-generated emissions in the early 1980s — with a five-year elasticity near 0.5 — but reversed course by the end of the 1980s, eventually reaching an elasticity of −0.7 by the end of the sample. Examination of time-varying interaction variables suggests that environmental regulation, tertiarization, and a larger share of spending on public goods are associated with a mitigation — or even a reversal — of the emissions growth related to economic expansions driven by government spending. The income channel plays a more limited role, mostly confined to the earlier part of the sample. Furthermore, government consumption and investment are both associated with these shifts in emissions elasticities.