Environmental Macroeconomics: Economic Growth, Fiscal Spending and Environmental Quality

In the existing literature much attention has been given to the toolbox of regulatory policy instruments for addressing environmental concerns. Microeconomic treatment of environmental policy considers the optimal allocation of a given scale of resource flow within the economy, but neglects the scale and composition of economic activity relative to the ecosystem that supports it. An ecological approach to macroeconomics requires the appreciation of physical constraints to economic growth. This paper presents the theoretical underpinnings and the empirical findings of the literature on the link between economic growth and environmental quality, as well as of the relationship between fiscal spending and environmental degradation, by reviewing the relevant literature. The empirical findings on both relationships are not robust and therefore remain inconclusive. This paper provides conclusions and directions for future research which may assist to solve this ambiguity on the examined relationships.