Analysis of the Impact of Economic Policies on Climate Change Mitigation

Climate change mitigation requires adequate insights into the underlying causes to ensure environmental sustainability. To attain macroeconomic goals, countries deploy economic policies such as fiscal policy tools (government expenditure and taxation), monetary policy tools (real interest rate and money supply), and external policy variables (foreign trade and foreign direct investment). Though these tools/variables have the capacity to enhance sustained economic growth, they could have ramifications for climate change. Hence, this study is motivated by the necessity to balance the demands of economic policies on the environment and the economy. It determines the impact of economic policies on climate change using the panel data of 38 Organization of Economic Cooperation and Development (OECD) and 78 non‐OECD countries during 1990–2020. Evidence from the system Generalized Method of Moments (GMM) estimation indicates that government consumption expenditure, real interest rate, and money supply play vital roles in climate change mitigation, while foreign trade aggravates climate change in OECD and non‐OECD nations. Though tax revenue has an insignificant impact on climate change in OECD nations, it intensifies climate change in non‐OECD nations. Besides, the pollution halo hypothesis was confirmed in OECD nations, while the pollution haven hypothesis was confirmed in non‐OECD nations. This study implies that efforts to mitigate climate change should integrate fiscal, monetary, and external policies.