Does Economic Policy Impact the Environment in South Asia? The Role of Disaggregated Energy Consumption in an EKC Framework

Economic policies often play a substantial role in shaping environmental quality worldwide. In light of this, this research analyzes the impact of economic policy, particularly “fiscal and monetary policy (FMP)” on CO2 discharges and ecological footprint (EF) in South Asian (SA) countries based on the “environmental Kuznets curve (EKC)” framework, controlling disaggregated energy consumption. It employs a “pooled mean group (PMG)” estimate and a “Dumitrescu-Hurlin causality check” using panel data for the years 1990–2021. The PMG estimate confirms a persistent connection between variables of interest. The research backs up the EKC hypothesis for the SA nations, showing a link between reduced ecological footprint and CO2 discharges, increased usage of renewable energy, and FMP. Nonrenewable energy use increases ecological footprint and carbon emissions, whereas per capita GDP increases pollution, and GDP2 per capita lowers pollution. The D-H causality testing confirms the reliability of PMG results by revealing several unidirectional and bidirectional causal relationships. Based on our research, we conclude that efficient fiscal and monetary instruments are one of the most essential tools for reducing SA countries’ ecological footprints and CO2 emissions.