Exploring the Impacts of Economic Policies, Policy Uncertainty, and Politics on Carbon Emissions

Environmental and Resource Economics https://doi.org/10.1007/s10640-025-00954-6 Exploring the Impacts of Economic Policies, Policy Uncertainty, and Politics on Carbon Emissions Wan-Jiun Paul Chiou1 · Shan-Heng Fu2 · Jeng-Bau Lin3 · Wei Tsai3 Accepted: 6 January 2025 © The Author(s) 2025 Abstract Addressing climate change challenges through managing and mitigating CO2 emissions has taken center stage in shaping economic policies. This paper analyzes the intricate interplay among economic policies, their uncertainty, political dynamics, and CO2 emissions by utilizing the U.S. data from 1973 to 2024. Our empirical results derived from the autoregressive distributed lag (ARDL) model with dummy variables indicate that expansionary monetary policies and higher corporate tax rates may increase CO2 emissions. Political factors, including economic policy uncertainty and the political climate, yield long-term impacts on CO2 emissions. The dominant party in the legislative branch, but not the presidency, emerges as a key determinant in carbon dioxide emission control, underscoring the significance of consensus-building in democratic processes, yet with variation in effects across different chambers. The robustness of these key findings is reaffirmed through different models. The findings suggest that party affiliation does not always dictate environmental policy outcomes, emphasizing the complexity of policy formulation and its representation within legislative bodies, providing insight to decision-makers when economic policies are considered. Keywords Monetary Policy · Fiscal Policy · Economic Growth · Economic Policy Uncertainty · Political Party · Carbon Emissions 1 Introduction The escalating impacts of greenhouse gases on global climate have prompted profound economic and scientific concerns and have become a pivotal international priority (Stips et al. 2016). The long lifespan of carbon dioxide, ranging from 50 to 200 years, indicates the urgency of managing emissions resulting from human activities. The emergence of collaborative initiatives like the Paris Agreement, designed to forestall climate feedback loops and maintain Earth’s temperature below 1.5 degrees above pre-industrial levels, attests to the gravity of the situation. A recent report by Bilal and Känzig (2024) reveals that a 1 °C increase in global temperature results in a 12% reduction in global GDP, suggesting the Extended author information available on the last page of the article 13 W.-J. P. Chiou et al. social cost of carbon is higher than previously estimated and highlighting the urgent need to control CO2 emissions, both in physical economies and financial sectors. For instance, Aragon and Chen (2024) report that climate change, emissions, environmental policy, and pollution are among the top five most important environment, social, and governance (ESG) factors influencing mutual fund investment in the U.S. It is vital to analyze how economic policies and political factors shape CO2 emissions within the framework of democratic decision-making, given the widespread and longlasting impacts of greenhouse gases on the environment, society, and the economy. Governments worldwide are instituting diverse policies to curtail emissions and confront the challenges of global climate change. However, past research mainly concentrated on the executive branch but gave relatively little consideration to the role of legislators in this context, ignoring the legislative branch could be decisive in shaping a consensus of actions in a democratic system. This study seeks to bridge the gap by concurrently considering the effects of economic policies and political dynamics on CO2 emissions, aiming to provide insights into sustainable emission reduction strategies. As global efforts intensify to combat climate change, understanding the intricate dynamics between economic policies, political powers, and environmental impact becomes not only a scholarly pursuit but also a crucial endeavor with implications for the future of our planet. This study contributes to the literature by comprehensively analyzing how economic policies and the political climate address environmental issues in a free-market economy. It finds that higher emissions are generally associated with expansionary fiscal policies, contractionary monetary policies, lower economic policy uncertainty (EPU), and right-wing ruling parties. As various branches of a government and political parties can influence policies, empirical research on institutional impacts can shed light on the effectiveness of economic policies in improving environmental performance in a market economy. Differences in political ideologies often result in varying approaches to public administration, including government spending, taxation, and financial market policies. As developed nations rely on market mechanisms to address climate change, this study examines the CO2 emission issue by considering economic policies and political dynamics. Specifically, we analyze how fiscal and monetary policies affect carbon dioxide emissions and how political dynamics, particularly shifts in control across government branches, impact air pollution levels. This topic is especially relevant considering the political polarization observed in recent decades, particularly in countries like the U.S., as noted by Hare and Poole (2014). Our study is based on the theories that link political economy with environmental policies. As government agendas determine the interconnections between policies and economic activities, political ideology theory suggests that the parties holding various political ideologies may employ different approaches and strategies to deal with issues while in power (Bjørnskov and Potrafke 2011, 2012; Pearce 2006), directly linking to the spending and revenue of government. Garmann (2014) discusses how fiscal policy decisions impact CO2 emissions as expansionary fiscal policies can stimulate economic activity and lead to higher CO2 emissions. The impact of monetary policies can be complex as high interest rates can slow economic growth, not only lowering CO2 emissions but also reducing investments in green technologies. Garmann (2014); Chang and Berdiev (2011); Neumayer (2003, 2004); and Potrafke (2010) document that leftist governments in most developed countries are more likely to implement stringent policies targeting corporations and protecting the environment while their counterparts tend to be less regulated. 13 Exploring the Impacts of Economic Policies, Policy Uncertainty, and… On the other hand, the electoral view theory by Quinn and Shapiro (1991) states that parties develop electorally motivated policies that may differ from their political ideologies. Their argument is consistent with Botta and Koźluki (2014); Neumayer (2008); Pilkington (2019); and Wen et al. (2016). Due to their preference for law and order, rightists are more likely to formulate strict environmental (...truncated)