How effective are green spending multipliers? Eco-friendly vs non-eco-friendly spending in OECD economies

This study aims to provide new empirical insights on estimating the effects of various green spending variables, within the multipliers context, on output growth of OECD economies. Using Jorda's (2005) local projection model, covering the period 2000–2022, we find that a one percent (or unit dollar) spending on clean energy; that is, renewable energy, and energy efficiency, indeed generates more than a percent worth of economic activity (multiplier effects) as compared to investment in non-eco-friendly industries (fossil fuels). We empirically show that green spending not only has stimulative effects on output growth, but also tends to reduce carbon emissions over the medium term. Besides positively increasing employment and reducing unemployment, we find that carbon pricing has limited effects on inflation, but it helps improve the fiscal position and tax revenue of the OECD economies. Our main policy suggestions, therefore, are to prioritize nature-based solutions and the right mix of macro-fiscal toolkit to tackle climate challenges and spur economic activity.