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

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 CO2 emissions. The countries with higher CO2 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 CO2 emission pattern. The analysis underlines the importance of limiting provision of subsidies both in developed and developing countries