From Carbon Growth to Reduction: U.S. Public Spending’s Emissions Transformation

A new working paper released by the International Monetary Fund (IMF) and co-authored by economists from the University of Salerno and the IMF Research Department offers a compelling and granular view of how government spending has influenced carbon emissions over the last four decades in the United States. Titled "Time-Varying Impacts of Government Spending on CO₂ Emissions," the paper, authored by Stefano Di Bucchianico, Mario Di Serio, Matteo Fragetta, and Giovanni Melina, analyzes how fiscal policy's environmental consequences have evolved from the early 1980s to the pre-pandemic period using a sophisticated Bayesian factor-augmented interacted vector autoregression model (FAIVAR-X). The model is designed to capture nonlinearities and control for anticipatory effects, shedding light on whether public spending worsens or helps reduce CO₂ emissions, and under what conditions.

From Carbon Booster to Emissions Moderator

The findings are striking. In the early 1980s, government spending in the U.S. typically boosted CO₂ emissions, particularly on the consumption side. The five-year elasticity of consumption-generated emissions was around 0.5, meaning a 1% increase in government spending led to a 0.5% rise in emissions. By 2019, however, this elasticity had dropped sharply to 0.1. On the production side, the pattern was even more dramatic. What began as a positive elasticity of about 0.4 in the early 1980s reversed course by the 1990s and turned negative. By the end of the study period, production-generated emissions had a five-year elasticity of –0.5, suggesting that increased public spending was actually associated with emissions reductions in industrial sectors.

These turning points reveal a fundamental transformation in the carbon footprint of fiscal policy. The paper suggests that the shift has not occurred in a vacuum; it reflects deeper structural changes in the economy, from the rise of the service sector to the tightening of environmental regulations.

Four Forces Behind the Emissions Shift

To explain the changing elasticity of emissions, the researchers identified four key variables that influence how government spending translates into carbon output: income (measured via per capita GDP), the degree of tertiarization (or share of service sector employment), environmental regulation (measured using a news-based index), and the composition of public spending (especially the share directed to public goods like health, education, and housing).

By calculating ten-year rolling-window partial correlations, the paper finds that environmental regulation and tertiarization were consistently associated with lower emission elasticities. In other words, as the U.S. economy shifted away from manufacturing and environmental policy became stricter, the carbon cost of government spending fell. Income had a more mixed effect, generally correlated with higher emissions, though not uniformly across all periods. Spending composition, meanwhile, showed the most nuanced effects, with its influence on emissions varying across time depending on which public programs were emphasized.

Not All Spending Is Created Equal

Crucially, the researchers disaggregated government spending into consumption and investment. Government consumption, which includes wages, procurement, and service delivery, proved to be the principal driver of changes in emissions elasticity over time. Its patterns mirrored those of total government spending: household-level emissions rose after fiscal expansions but to a diminishing extent, while emissions from production flipped from rising to falling. These shifts became particularly pronounced after the 1990s when green procurement practices and a more service-oriented public sector began to alter the carbon consequences of state consumption.

Government investment, such as infrastructure and capital projects, painted a more cyclical picture. Emission elasticities tied to investment spiked during the infrastructure surge of the early 2000s and dipped after the global financial crisis, with no long-term structural shift in its carbon impact. Even when showing a downward trend, investment-driven emissions largely remained in positive territory, particularly on the production side. This suggests that despite technological advances, capital projects still rely heavily on carbon-intensive materials and processes.

Fiscal Policy for a Green Future

The broader implications of the paper are profound. It effectively bridges two previously separate strands of economic research: one focused on the size and timing of fiscal multipliers and the other on the environmental consequences of economic activity. By linking emissions responses to observable structural conditions, the study resolves conflicting results from earlier research and provides policymakers with a roadmap for designing more environmentally sustainable fiscal policies.

The message is clear: fiscal policy is not intrinsically harmful to the environment. Its impact depends on how spending is allocated, the structure of the economy, and the policy context in which it operates. Strong environmental regulations, a shift toward services, and spending that targets market failures, such as pollution or healthcare access, can all reduce the emissions intensity of fiscal expansions.

The authors argue that greening fiscal policy will require continued attention to regulatory design and spending composition. With smarter government consumption and cleaner public investment, fiscal policy can not only stimulate economic growth but also help combat climate change. Extending this analytical framework to other gases, alternative fiscal tools, and international settings could further refine our understanding of how public finance intersects with global climate goals. This paper sets a strong precedent for that ongoing inquiry.