Towards a greener tomorrow: What role does fiscal policy play in fostering environmental sustainability in Pakistan?

The concept of environmental sustainability has become a significant concern in the last several decades. The degradation of the environment has significant implications for human well‐being, subsequently affecting productivity and economic growth. Consequently, achieving the goal of environmental sustainability emerges as a primary objective. The goal of this study is to develop an Environmental Sustainability Index that specifically targets factors related to air, land, and water. The second goal is to assess the short‐ and long‐term impacts of fiscal policies on the environmental sustainability. The asymmetric influence of fiscal measures on sustainability is assumed in the present investigation. A time series data for the period 1974–2020 are used for the analysis. For the estimation of asymmetric effects, the Nonlinear Autoregressive Distributed Lag (NARDL) technique is applied. Based on the research findings, it can be concluded that subsidy and developmental expenditures have a detrimental effect on environmental sustainability in the presence of positive shocks. Conversely, a negative shock in subsidies does not yield a significant impact, whereas a negative shock in development expenditures has a noteworthy and adverse influence on environmental sustainability. In the short run, the positive shock to both subsidy and developmental expenditures significantly affects environmental sustainability while the negative shock to developmental expenditure has an insignificant impact while subsidy has a significant effect on environmental sustainability. The study suggests that while making fiscal policies, the government should consider the environmental aspects of these measures.