The role of government spending within the environmental Kuznets curve framework: evidence from G7 countries

This study assesses the role of government spending on environmental sustainability based on a framework that combines the environmental Kuznets curve (EKC) hypothesis with the Armey curve hypothesis. Specifically, the inverted U-shaped relationships between carbon (CO₂) emissions and economic growth (EKC hypothesis) and between government spending and economic growth (Armey curve hypothesis) are analyzed using a composite EKC model tested for cross-sectional dependence and heterogeneity, panel unit root, panel co-integration, and the augmented mean group estimation. In so doing, this study pursues a potential transmission mechanism leading from government spending to CO₂ emissions through the growth channel and presents a novel way to develop a better understanding of how economic growth policy and energy policy can be synchronized. Empirical results show that economic growth acts as a transmitter between government spending and CO₂ emissions in the USA, UK, and Canada. However, the composite EKC hypotehesis is confirmed only for the USA and Canada, where the optimal level of government spending that maximizes CO₂ emissions is 29.87% and 29.22% of GDP, respectively. In contrast, the optimal level of government spending equivalent to 28.30% of GDP minimizes CO₂ emissions in the UK. The key policy implication is that governments can achieve sustainable economic growth by setting standards for their spending levels.