The channels of the effect of government expenditure on the environment: evidence using dynamic panel data

This paper explores the relationship between government spending and environmental quality using panel data for 94 countries for the period 1970-2008. We identify and estimate three distinct channels that comprise the total direct effect of government expenditure on air pollution, namely a marginal effect, an effect conditional on economic growth and an effect conditional on institutional quality. Since adjustment rate of emissions to their equilibrium level is slow due to technological and institutional reasons, we explicitly take into account dynamics by applying appropriate econometric methods. The results demonstrate that there is a significant alleviating direct effect of government expenditure on SO2 and NOx emissions, which increases with the level of economic growth and democracy. However, there is no evidence of a significant effect on pollutants with more global impact on the environment and human health, like N2O and CO2, implying that the adoption of international environmental treaties is required in this case.