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How effective are green spending multipliers? Eco-friendly vs non-eco-friendly spending in OECD economies

Author

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  • Shah, Syed Sadaqat Ali
  • Wu, Kai

Abstract

This study aims to provide new empirical insights on estimating the effects of various green spending variables, within the multipliers context, on output growth of OECD economies. Using Jorda's (2005) local projection model, covering the period 2000–2022, we find that a one percent (or unit dollar) spending on clean energy; that is, renewable energy, and energy efficiency, indeed generates more than a percent worth of economic activity (multiplier effects) as compared to investment in non-eco-friendly industries (fossil fuels). We empirically show that green spending not only has stimulative effects on output growth, but also tends to reduce carbon emissions over the medium term. Besides positively increasing employment and reducing unemployment, we find that carbon pricing has limited effects on inflation, but it helps improve the fiscal position and tax revenue of the OECD economies. Our main policy suggestions, therefore, are to prioritize nature-based solutions and the right mix of macro-fiscal toolkit to tackle climate challenges and spur economic activity.

Suggested Citation

  • Shah, Syed Sadaqat Ali & Wu, Kai, 2025. "How effective are green spending multipliers? Eco-friendly vs non-eco-friendly spending in OECD economies," Energy Policy, Elsevier, vol. 204(C).
    • Handle: RePEc:eee:enepol:v:204:y:2025:i:c:s0301421525001831
    DOI: 10.1016/j.enpol.2025.114676
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    More about this item

    Keywords

    Green spending; Renewable energy; Energy efficiency; Environmental spending; Carbon pricing; Output growth;
    All these keywords.

    JEL classification:

    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • P18 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Energy; Environment
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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