Relationship between Fiscal Subsidies and CO₂ Emissions: Evidence from Cross-Country Empirical Estimates

Abstract

Countries disburse subsidies with various motivations, for example, to promote industrial development, facilitate innovation, support national champions, and ensure redistribution. The devolution of subsidies may however also encourage economic activities leading to climate change related concerns, reflected through higher greenhouse gases (GHGs) emissions, if such activities are conducted beyond sustainable point. Through a cross-country empirical analysis involving 131 countries over 1990-2010, the present analysis observes that higher proportional devolution of budgetary subsidies leads to higher CO 2 emissions. The countries with higher CO 2 emissions are also characterized by higher per capita GDP, greater share of manufacturing sector in their GDP, and higher level of urbanization. In addition, the empirical findings underline the importance of the type of government subsidy devolution on CO 2 emission pattern. The analysis underlines the importance of limiting provision of subsidies both in developed and developing countries.

Do Government Environmental Subsidies Improve Corporate Carbon Performance? Evidence From China

“…These two types of subsidies have heterogeneous impacts on CER (Wu & Chen, 2022); thus, the negative effect of government environmental subsidies on carbon emissions documented by Mukherjee and Chakraborty (2014) could derive from the overproduction effect induced by the general government subsidies. Besides, Mukherjee and Chakraborty (2014) focus on the carbon emissions at country level rather than firm level, which could lead to biased findings because the government subsidizes the firm's environment-friendly projects but not the public who is also the contributor of carbon emissions. In this paper, we document a positive relationship between government environmental subsidies and corporate carbon performance and thus contribute to this literature stream.…”

“…First, our study contributes to the emerging literature concerning the environmental effect of government subsidies. The existing literature has investigated how government subsidies affect corporate social responsibility (CSR), corporate environmental responsibility (CER), innovation activities, green innovation, and nationwide carbon reductions (Liu, Quan, et al, 2019; Mukherjee & Chakraborty, 2014; Wang & Zhang, 2020; Xia et al, 2022; Zhang et al, 2021). It is worth noting that there are two gaps in the literature: (i) there are no studies that pay attention to the impact of government subsidies from the perspective of corporate carbon performance; (ii) there are only a few studies that differentiate government environmental subsidies from the general government subsidies, such as Ren et al (2021) and Wu and Chen (2022).…”

“…However, Mukherjee and Chakraborty (2014)’s findings could be biased due to the failure to extract government environmental subsidies from the general government subsidies. These two types of subsidies have heterogeneous impacts on CER (Wu & Chen, 2022); thus, the negative effect of government environmental subsidies on carbon emissions documented by Mukherjee and Chakraborty (2014) could derive from the overproduction effect induced by the general government subsidies. Besides, Mukherjee and Chakraborty (2014) focus on the carbon emissions at country level rather than firm level, which could lead to biased findings because the government subsidizes the firm’s environment-friendly projects but not the public who is also the contributor of carbon emissions.…”

“…Using a cross-country sample, they show that government subsidies increase carbon emissions. However, Mukherjee and Chakraborty (2014)'s findings could be biased due to the failure to extract government environmental subsidies from the general government subsidies. These two types of subsidies have heterogeneous impacts on CER (Wu & Chen, 2022); thus, the negative effect of government environmental subsidies on carbon emissions documented by Mukherjee and Chakraborty (2014) could derive from the overproduction effect induced by the general government subsidies.…”

“…It is worth noting that there are two gaps in the literature: (i) there are no studies that pay attention to the impact of government subsidies from the perspective of corporate carbon performance; (ii) there are only a few studies that differentiate government environmental subsidies from the general government subsidies, such as Ren et al (2021) and Wu and Chen (2022). The closest prior study to ours is conducted by Mukherjee and Chakraborty (2014) who explore the impact of government subsidies on carbon emissions at the country level. Using a cross-country sample, they show that government subsidies increase carbon emissions.…”