Do fiscal policy and economic growth improve or harm the environment? An empirical analysis with a Bayesian approach and threshold estimation in one of the emerging and growth-leading economies

Nguyen, My-Linh Thi; Ho, Thi Lam Article Do fiscal policy and economic growth improve or harm the environment? An empirical analysis with a Bayesian approach and threshold estimation in one of the emerging and growth-leading economies Cogent Economics & Finance Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Nguyen, My-Linh Thi; Ho, Thi Lam (2024) : Do fiscal policy and economic growth improve or harm the environment? An empirical analysis with a Bayesian approach and threshold estimation in one of the emerging and growth-leading economies, Cogent Economics & Finance, ISSN 2332-2039, Taylor & Francis, Abingdon, Vol. 12, Iss. 1, pp. 1-20, https://doi.org/10.1080/23322039.2024.2408271 This Version is available at: https://hdl.handle.net/10419/321611 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Economics & Finance ISSN: 2332-2039 (Online) Journal homepage: www.tandfonline.com/journals/oaef20 Do fiscal policy and economic growth improve or harm the environment? An empirical analysis with a Bayesian approach and threshold estimation in one of the emerging and growthleading economies My-Linh Thi Nguyen & Thi Lam Ho To cite this article: My-Linh Thi Nguyen & Thi Lam Ho (2024) Do fiscal policy and economic growth improve or harm the environment? An empirical analysis with a Bayesian approach and threshold estimation in one of the emerging and growth-leading economies, Cogent Economics & Finance, 12:1, 2408271, DOI: 10.1080/23322039.2024.2408271 To link to this article: https://doi.org/10.1080/23322039.2024.2408271 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group Published online: 29 Sep 2024. Submit your article to this journal Article views: 762 View related articles View Crossmark data Citing articles: 1 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oaef20 ENVIRONMENTAL ECONOMICS & SUSTAINABILITY | RESEARCH ARTICLE Do fiscal policy and economic growth improve or harm the environment? An empirical analysis with a Bayesian approach and threshold estimation in one of the emerging and growth-leading economies My-Linh Thi Nguyen and Thi Lam Ho University of Finance –Marketing (UFM), Ho Chi Minh City, Vietnam ABSTRACT As one of the Emerging and Growth-Leading Economies (EAGLES), Vietnam is maintaining rapid economic development at the cost of environmental degradation. However, the impact of economic growth and the role of fiscal policy tools in Vietnam’s pollution equation remains unclear. This study uses a Bayesian approach and threshold estimation to quantitatively assess the relationship between economic growth, fiscal policy tools, and environmental degradation in Vietnam from 1990 to 2021. The results indicate that tools of the fiscal policy significantly contribute to environmental degradation, with government expenditure having a greater impact than taxation. Economic growth exhibits a U-shaped relationship with degradation, implying the existence of an inverted Environmental Kuznets Curve (EKC) hypothesis in a transitional economy. In the early stages of Vietnam’s development, characterized by an agricultural economy, economic growth positively affected the environment. However, economic growth exacerbates environmental degradation in the pre-industrialization and industrialization phases. Diagnostic tests are also applied to confirm the reliability and validity of the empirical estimates, providing valuable insights for proposed policy implications in the study. IMPACT STATEMENT This study offers critical insights into the relationship between economic growth, fiscal policy, and environmental degradation in Vietnam, an Emerging and Growth-Leading Economy (EAGLE). By applying advanced Bayesian techniques and threshold estimation, the research highlights the significant role of fiscal policy tools—particularly government expenditure—in contributing to environmental degradation. The discovery of a U-shaped relationship between economic growth and environmental impact supports the inverted Environmental Kuznets Curve (EKC) hypothesis in Vietnam’s transitional economy. These findings emphasize the need for targeted fiscal reforms to balance economic growth with environmental sustainability, providing a valuable foundation for policymakers to mitigate environmental harm during Vietnam’s ongoing industrialization. ARTICLE HISTORY Received 31 July 2024 Revised 14 September 2024 Accepted 19 September 2024 KEYWORDS Bayesian; fiscal policy; EKC; environment; economic growth JEL CODE C11; C24; E62; Q53; Q56 SUBJECTS Economics; Finance; Environmental Economics 1. Introduction Environmental degradation and climate change are pressing issues in most countries’deliberations. This is particularly serious in transitioning and developing countries with rapidly increasing population, high urbanization rates, and intense industrialization processes. Moreover, the production patterns in these countries heavily rely on energy, primarily fossil fuels. It is widely recognized that the use of fossil fuels such as oil and natural gas plays a significant role in air pollution, poses health risks to humans, and contributes to air pollution (Kristrom & Riera, 1996). Given the widespread and profound negative CONTACT Thi Lam Ho [email protected] University of Finance –Marketing (UFM), Ho Chi Minh City, Vietnam ß2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent. COGENT ECONOMICS & FINANCE 2024, VOL. 12, NO. 1, 2408271 https://doi.org/10.1080/23322039.2024.2408271 impacts of environmental pollution, the governments of these countries need to implement policies to control harmful emissions. Vietnam is one of the EAGLES, 1 with consistently high annual economic growth rates compared to the region and the world. Vietnam is known as one of the most dynamic economies in Southeast Asia. Vietnam maintained a high economic growth rate, averaging 6.81% from 2016 to 2019 In 2018 and 2019, Vietnam’s GDP reached 7.08% and 7.02%, respectively. Despite being affected by COVID-19, Vietnam’s GDP growth still reached 2.91% in 2020. The high economic growth rate has also put significant pressure on the environment due to waste generated from economic development, industrialization, and urbanization. In 2018, Vietnam ranked 159th out of 180 countries in air quality. According to the statistics from the Greenhouse Gas Emissions Report submitted to the United Nations Framework Convention on Climate Change (UNFCCC) and the World Resources Institute (WRI) of the United States, Vietnam’s per capita emissions ranked 125th in the world at 3.1 tons of CO2 per person. Approximately 60,000 deaths each year are related to outdoor and indoor air pollution. Furthermore, air pollution affects the development of the nervous system and cognitive abilities of children. Children exposed to high levels of air pollution are at a higher risk of developing chronic diseases in the future. The Global Burden of Disease Study 2019 2 also identified air pollution as the fifth leading cause of fatalities and diseases in Vietnam, following other factors, such as hypertension, diabetes, smoking, and alcohol use. According to a World Bank report in 2016, 3 the global economic cost of air pollution is billions of dollars annually, with labor productivity losses and premature deaths related to air pollution amounting to US$225 billion. It is evident that environmental pollution has become one of the most challenging issues in developing and transitioning countries like Vietnam. Pollution can affect the most vulnerable population groups in Vietnam and pose a threat to the achievements made in development. In the next stage of economic development strategy, Vietnam has set a long-term vision for balanced and inclusive growth, based on ensuring the harmony between economic growth, social development, environmental protection, and climate change adaptation. This demonstrates the Vietnamese government’s particular concern for sustainable development, aiming for a balance between economic growth and environmental quality. The Vietnamese government has also taken policy actions to combat environmental pollution and climate change; accordingly, fiscal policy tools including taxation and government expenditure play an important role. Government spending on the environment and climate action accounts for an average of 1% to 1.5% of the total government expenditure. Revenues from environmental protection taxes also make positive contributions to the state budget revenues and help regulate environmental quality in Vietnam. Specifically, the ratio of environmental protection tax revenues to total state budget revenues has been continuously increasing, reaching 2.71% in 2015, 3.61% during the period of 2016–2019, 3.93% in 2020 and 4% in 2021 (General Statistics Office of Vietnam, 2022). However, to the best knowledge of the authors, there are still no studies evaluating the impact of fiscal policy, especially the impact of taxes, on environmental pollution in Vietnam. Furthermore, previous studies mainly focused on examining the impact of economic growth, foreign direct investment inflows, or trade openness on the environment through frequency regression methods. However, these methods have a significant drawback in that the accuracy of the model heavily relies on the number of observations in the sample. Meanwhile, at the national level, obtaining a large sample size is challenging. This study employs a new analytical framework –Bayesian and threshold regression. The Bayesian method has the advantage of estimating regression results in the form of probability distributions, which applies to small data samples and enhances the robustness of the estimation results (McNeish, 2016). Additionally, using the Metropolis-Hastings algorithm to construct a Markov Chain Monte Carlo (MCMC) and interpreting the results as probability distributions of parameter values helps overcome the limitations of traditional regression methods such as autocorrelation, imbalanced data, endogeneity, and heteroscedasticity (Ram ırez Hassan & Montoya Bland on, 2019). Meanwhile, with threshold regression, we can detect any non-linear relationships among the research variables and provide a more detailed and comprehensive understanding of the impact of fiscal policy tools and economic growth on environmental pollution. This study evaluates fiscal policy’s impact on the environment and reexamines the tradeoff relationship between economic growth and environmental pollution in Vietnam according to the environmental Kuznets curve hypothesis. It seeks to address two central questions: (1) What are the effects of fiscal 2 M.-L. THI NGUYEN AND T. L. HO policy and economic growth on environmental degradation in Vietnam? and (2) Is there an income threshold at which the influence of economic growth on environmental pollution shifts? By exploring these questions, the research provides valuable insights for policymakers, helping them refine policies, and encourages businesses and consumers to adapt their practices to achieve sustainable and effective growth. This study makes significant contributions both theoretically and practically. Theoretically, by applying Bayesian and threshold estimation techniques, ensuring the reliability of results even with smaller data samples, our study enhances the understanding of the interplay between fiscal policy, economic growth, and environmental outcomes in Vietnam. Firstly, it reveals that taxation, while intended to address externalities, can paradoxically exacerbate pollution by discouraging green technology investments and encouraging informal economic activities. This insight challenges the traditional view that higher taxes unequivocally improve environmental outcomes. Additionally, the research uncovers a nonlinear relationship between economic growth and environmental pollution, with distinct breakpoints indicating varying impacts at different levels of GDP per capita. Specifically, while low-income economies may experience reduced pollution, industrialization and high-income growth phases correlate with increased environmental pressure. These findings provide a more comprehensive view of the complex dynamics between fiscal policies, economic development, and environmental quality. Practically, the findings provide actionable insights for adjusting fiscal policies to mitigate environmental degradation while promoting economic growth. 2. Literature review 2.1. Fiscal policy and environmental pollution Ensuring environmental quality is one of the fundamental prerequisites for sustainable economic growth (Postula & Radecka-Moroz, 2020). Governments in many countries have used fiscal policy to improve the mobilization and allocation of funds, aiming to stabilize the national financial system and protect the environment. Fiscal policy plays a crucial role in addressing global challenges and transitioning to a comprehensive green economy. By reflecting externalities in prices, adjusting government expenditure toward environmental objectives, increasing income, creating fiscal space for green investments, and implementing wide-ranging fiscal reforms, such policies can support the Sustainable Development Goals (SDGs) and the Paris Climate Agreement. Fiscal policy can directly influence the behaviors of individuals and businesses toward the environment, thereby improving environmental quality and reducing pollution levels. Fiscal policy can be understood as governmental interventions through efficient mobilization and allocation of financial resources to achieve economic and social growth objectives, particularly focusing on environmental protection (Postula & Radecka-Moroz, 2020) and promoting sustainable economic growth (Nguyen & Bui, 2022; Nguyen et al., 2023; Ramey, 2011). The main tools of fiscal policy are government spending and taxation. Currently, most countries worldwide are focusing on the improvement in the quality of economic growth, with an emphasis on the equilibrium between environmental protection and economic growth. This balance is a crucial prerequisite for achieving long-term sustainable economic growth, and fiscal policy plays an important role in realizing this goal. A well-designed fiscal policy increases financial resources to meet environmental protection needs, thereby stimulating sustainable economic growth (Porter & Linde, 1995). Fiscal policy also plays a significant role in reducing deforestation and forest-related emissions. While it is not straightforward to cope with this environmental issue through fiscal tools such as taxes, fines, and fees, effective management and policies that enhance awareness of optimal land use can help achieve the objectives of reducing deforestation and climate change (Cadman et al., 2019). Various empirical studies have assessed the impact of fiscal policy on environmental protection, primarily focusing on the effects of government spending. For instance, studies by Dholakia et al. (2013); Morley (2012), and Bernauer and Koubi (2009) have examined the impact of government spending on environmental protection. Abid (2017) and Gholipour and Farzanegan (2018) suggest that government spending contributes to limiting greenhouse gas emissions in Europe but has a negligible impact in the COGENT ECONOMICS & FINANCE 3 Middle East and North Africa due to inefficient allocation. Additionally, L opez and Palacios (2014) and Adewuyi (2016) emphasize the impact of government spending components on the environment, indicating that increasing total government spending without changing expenditure items negatively affects environmental quality. Halkos and Paizanos (2013) found that government spending’s impact varies based on income levels, with higher spending leading to higher CO2 emissions but potentially reducing SO2 emissions in lower-income countries. Several studies have also comprehensively assessed the impact of fiscal policies, including government spending and taxes, on environmental quality. Zahra et al. (2022) and Ike et al. (2020) investigated the impact of fiscal policy on the environment in Pakistan and Thailand, respectively, finding a dialectical relationship between environmental degradation and fiscal policy. Chan (2020) and Cheng et al. (2024) explored the importance of fiscal and monetary policies in stabilizing air pollutants and CO2 emissions, concluding that fiscal policy significantly determines carbon emission stability. Iqbal et al. (2022) demonstrated that fiscal decentralization and economic growth positively determine CO2 emissions, while renewable energy use negatively impacts emissions in OECD countries. Angelopoulos et al. (2012) and Kuo et al. (2016) highlighted the importance of tax variations in determining environmental quality, with Dongyan (2009) indicating that effective tax rates and policies can control carbon emissions. Liu et al. (2017) also found that taxes are a crucial component of fiscal policy that promotes the use of green energy and improves environmental quality. Arltov a and Kot (2023) indicate that taxation is a key factor determining the environmental quality of OECD countries. Cadoret et al. (2020) examined the effectiveness of Pigouvian taxes in EU countries. Their findings indicate that higher Pigouvian tax rates effectively reduce environmental externalities and provide evidence supporting the double dividend hypothesis, suggesting that such taxes can also lead to additional economic benefits. These studies collectively underscore the multifaceted role of fiscal policy in addressing environmental challenges and promoting sustainable economic growth, emphasizing the need for well-designed fiscal interventions to achieve these goals. 2.2. Economic growth and environmental pollution 2.2.1. The environmental Kuznets curve (EKC) hypothesis The Environmental Kuznets Curve (EKC) is a theoretical model illustrating the increase in environmental degradation and pollution during the early stages of economic development and industrialization. However, as the economy grows and reaches a certain threshold of per capita income, environmental quality begins to improve, and pollution levels gradually decrease (see Figure 1). Numerous studies have been conducted to verify the EKC hypothesis. Stern (2004) explains the inverse relationship of the EKC based on four economic characteristics: production scale, economic structure, input changes, and technological development. Figure 1. The environmental Kunznets curve. Source: Panayotou (1993). 4 M.-L. THI NGUYEN AND T. L. HO Production scale: Theoretically, a 1% increase in production scale would result in a 1% increase in emissions, assuming the input-output ratio and production technology remain unchanged. However, this is not always practical, and thus, not all production scales can uniformly apply environmental controls. Output mix changes: When a country adopts open-door and integrated policies to boost economic development, it often experiences a structural shift in sectors. Initially, the economy tends to transition from agriculture to heavy industry. During this period, most heavy industries are resource-intensive and generate significant emissions, leading to increased environmental pollution. Conversely, in the later stages, there is a shift from heavy industry to light industry and services, resulting in reduced energy usage and decreased environmental pollution. Input changes: At each stage of economic development, alongside advancements in science and technology, environmentally friendly inputs are introduced into production processes, replacing harmful counterparts. For instance, natural gas replaces coal. This explains the initial increase in pollution and emissions during the early stages of economic development, which gradually decreases as the economy reaches a higher level of development. Technological development: Advanced economies have the resources to research and innovate technologies that enhance productivity and output, with unchanged or even reduced inputs. Consequently, the amount of waste per unit of output tends to decrease. Furthermore, these technological advancements are deliberately designed to reduce emissions during operation, significantly contributing to environmental improvement. 2.2.2. Tradeoff between economic growth and environmental degradation The relationship between economic growth and environmental degradation is debated from various perspectives. Figure 2 provides an overview of different views. The ‘new toxics’view claims that current pollutants tend to decrease due to technological improvements or substitute inputs accompanying economic growth, and the new pollutants replacing them tend to increase. These include carcinogenic chemicals, carbon dioxide, etc. As the older pollutants are cleaned up, new ones emerge, so overall environmental impact is not reduced. The ‘‘race to the bottom’’ view posits that emissions were reduced in developed countries by outsourcing dirty production to developing countries. These countries will find it harder to reduce emissions. However, the pressure of globalization may also preclude further tightening of environmental regulation in developed countries and may even result in its loosening in the name of competitiveness. The ‘revised EKC’view does not reject the inverted U-shape curve but suggests it is shifting downward and to the leftover time due to technological change. Arrow et al. (1996) pointed out the risk that small changes could cause severe damage, implying that focusing solely on economic growth to improve the environment without considering other potential impact factors may lead to countereffects. For instance, in the context of biodiversity, no expenditure would be able to restore extinct species, and can only focus on conserving existing diversity. Figure 2. The environmental Kunznets curve: alternative views. Source: Stern (2004). COGENT ECONOMICS & FINANCE 5 2.2.3. Empirical evidence on the impact of economic growth on environmental pollution Numerous studies have explored the Environmental Kuznets Curve (EKC) hypothesis, which posits an inverted U-shaped relationship between economic growth and environmental quality. Grossman and Krueger (1991) analyzed the air quality and economic growth of 42 nations, revealing that SO2 and smoke emissions initially increased with GDP per capita at lower-income levels. Similarly, Holtz-Eakin and Selden (1995) investigated CO2 emissions across 130 countries from 1951 to 1986, finding a positive correlation between CO2 emissions and economic growth up to an income turning point of $35,428 per person per year. Timmons Roberts and Grimes (1997) assessed CO2 emissions over 30 years (1962–1991) across many countries, confirming an initial increase in emissions with economic development. Galeotti and Lanza (1999) analyzed CO2 emissions and economic development in 110 nations (1960–1996), observing a nonlinear relationship in the form of an inverted U-curve. Kaufmann et al. (1998) substituted CO2 with SO2, finding a similar inverted U-curve relationship using various modeling techniques. Cole et al. (1997) investigated multiple environmental indicators (e.g. nitrates, CH4, urban waste) in 149 countries (1960–1990), confirming the EKC hypothesis for air pollutants. Selden and Song (1994) replicated Grossman and Krueger’s study with an expanded set of environmental variables, supporting the EKC curve. The turning point and subsequent decline in emissions at higher income levels have also been documented. Pao and Tsai (2010) demonstrated the EKC hypothesis in BRICS countries from 1971 to 2005, identifying a turning point at an income level of approximately $5,393. Poumanyvong and Kaneko (2010), using the STIRPAT model and data from 99 countries (1975–2010), found urbanization decreased energy consumption but increased CO2 emissions in low-income countries, and the opposite in middleand high-income countries. Mart ınez-Zarzoso and Maruotti (2011) analyzed CO2 emissions in developing countries (1975–2003), showing an inverted U-shaped relationship between urbanization and emissions. Nasir et al. (2011) identified a quadratic relationship between CO2 emissions and income in Pakistan (1972–2008), affirming the EKC hypothesis. Hiroyuki Taguchi (2012) examined 19 Asian countries (1950–2009) using the GMM method, confirming the inverted U-shaped relationship for SO2 emissions. Waslekar (2014) analyzed 30 countries (1960–2050), suggesting many developing economies will transition to developed states, following the EKC pattern. Kasperowicz (2015) verified the relationship between GDP and CO2 emissions in 18 EU countries (1995–2012), supporting the EKC hypothesis. Linh & Lin (2015) studied 12 populous Asian countries, showing that CO2 emissions began to decline at an income level of 8.9341 (logarithmically adjusted). Malik et al. (2020)inPakistan(1971–2014) supported the EKC hypothesis using the ARDL and nonlinear ARDL methods. The growth threshold and the inverse U-shaped nonlinear relationship between economic growth and environmental pollution, as proposed by the EKC hypothesis, are also observed in Asian countries (Ho & Ho, 2021;Hoetal.,2024). Despite these supportive findings, several studies have refuted the EKC hypothesis. De Bruyn et al. (1998) found a positive correlation between CO2, NO2, and SO2 emissions and economic growth in four developed countries, attributing emission reductions to changes in economic structure and technology. Agras and Chapman (1999) highlighted the significance of energy prices in EKC analysis, finding no evidence supporting the EKC for CO2 emissions. Hettige et al. (2000) investigated water pollution in industrial economies, showing water pollution remains unchanged or increases with income growth. Perman and Stern (2003), using cointegration analysis for 74 countries over 31 years, found no concave relationship between GDP and SO2 emissions. Richmond and Kaufmann (2006) asserted the absence of a turning point in the relationship between economic growth and CO2 emissions for both OECD and non-OECD countries. Luzzati and Orsini (2009) found limited applicability of the EKC hypothesis at both global and individual country scales. Taguchi (2012) demonstrated a trend of increasing CO2 emissions with rising income in 19 Asian countries. Al-Mulali et al. (2015), using the ARDL approach in Vietnam (1981–2011), found economic growth had a positive impact on environmental pollution, refuting the EKC hypothesis. Cetin et al. (2024) found that economic growth increases the ecological footprint in OECD countries. 3. Methodology 3.1. Data Annual data covering the years between 1990 and 2021 has been used in this study; The variables of the study are the cost incurred from carbon dioxide emissions on GDP (CO2) (%), the natural logarithm of constant GDP per capita (EG), population growth (POP), and overall government spending (GOV) as a 6 M.-L. THI NGUYEN AND T. L. HO percentage of GDP as a first proxy of fiscal policy (FP) and overall tax revenues as a percentage of GDP (TAX) and as a second proxy of FP. Data for CO2, EG, and POP have been gathered from the World Bank while data for GOV and TAX have been gathered from the Vietnam General Department of Taxation. We selected the research period from 1990 to 2021 for several reasons: First, this period marks Vietnam’s transition from a centrally planned economy to a socialist-oriented market economy, beginning with significant reforms in 1990. These reforms spurred rapid economic growth through policies such as attracting foreign direct investment (FDI) and promoting industrialization and urbanization, which also had notable environmental impacts due to increased industrial activity and energy consumption. Second, from the 1990s onwards, the Vietnamese government implemented various fiscal and environmental policies to control pollution and mitigate the negative environmental effects of economic growth. This timeframe is sufficient to observe and evaluate the impact of these policies while providing reliable data on economic and environmental changes. Third, this period aligns with heightened international discussions on climate change and sustainable development. Vietnam’s climate commitments, starting in the 1990s, including its participation in the UNFCCC and the Paris Agreement, offer a pertinent context for studying the relationship between fiscal policy and the environment. Finally, we chose to end the research period in 2021 because there are often delays in reports of government budget data and fiscal tools due to lengthy accounting processes. By selecting 2021, we ensure that the fiscal data is complete and accurately reflects the government’s financial and policy decisions. This timeframe allows for the inclusion of fully audited and updated budget information, enhancing the reliability of our analysis of fiscal policies and their impacts on the economy and environment. Thus, the 1990–2021 period facilitates the analysis of significant economic and environmental changes and provides valuable empirical evidence for current policy development. 3.2. Model This study investigates the impact of fiscal policy and economic growth on environmental pollution in Vietnam - one of the EAGLES. Model 1 is built to achieve the research objective. This model not only facilitates the analysis of fiscal policy impacts but also enables the determination of the economic growth thresholds. Above and below this threshold, the repercussions of economic growth on environmental pollution exhibit variation, thus essentially probing the validity of the EKC hypothesis. Should the existence of an economic growth threshold be substantiated, the subsequent phase involves an intricate estimation of the effects of economic growth (spanning the preand post-threshold) on environmental pollution. Therefore, Model 1 serves a dual purpose: it scrutinizes the implications of fiscal policy on environmental pollution and concurrently assesses the influence of economic growth on the same. The model is delineated as follows: CO2¼fEG,TAX,GOV,POP ðÞ (1) Where ’EG’represents economic growth, operationalized through the natural logarithm of Gross Domestic Product (GDP) per capita. The quantification of environmental pollution, denoted as ’CO2’,ismethodologically approached via the metric of cost incurred from carbon dioxide emissions, expressed as a percentage relative to GDP. The constructs of fiscal policy are comprehensively measured through two distinct indicators: tax revenue (TAX) and government expenditure (GOV). Specifically, TAX is conceptualized as the proportion of tax revenue to GDP, whereas GOV encapsulates the ratio of government expenditure to GDP. Furthermore, population growth (POP) assumes a critical role as a control variable within the research models. This variable is integrated into the analytical framework based on the theoretical and empirical foundations established by seminal research works, notably those of (Halkos & Paizanos, 2013;Lee&Gordon,2005). The definitions and measurement methodologies for these variables in Model 1 are delineated with precision in Table 1. Table 1. Description of variables. Variable name Measure Source Economic Growth EG Natural logarithm of constant GDP per capita WDI Environmental Pollution CO2 Damage cost of CO2 emissions (% of GDP) WDI Fiscal policy Taxation TAX Tax revenue (% of GDP) WDI Government Expenditure GOV Government expenditure (% of GDP) WDI Control Variable Population Growth POP Annual Growth Rate (%) of Total Population WDI Source: The authors. COGENT ECONOMICS & FINANCE 7 of waste. Finally, when governments focus on promoting economic growth while ignoring environmental protection measures, environmental pollution will increase due to a lack of management and control. Therefore, government spending can contribute to increasing environmental pollution through infrastructure and industrial development, increased use of fossil fuels, promotion of consumption and urban development, and lack of environmental regulation. Government spending can lead to increased pollution if not strictly managed and controlled, especially when economic priorities outweigh environmental protection measures. This finding is consistent with Adewuyi (2016); Bernauer and Koubi (2009); Halkos and Paizanos (2013); and Zahra et al. (2022). 4.2.2. Impact of economic growth on environmental pollution To investigate whether the impact of economic growth on environmental pollution is linear or nonlinear, we applied Hansen’s threshold model to identify transition thresholds, followed by Bayesian regression to assess the impact across different threshold regions. The results reveal two breakpoints in the impact of economic growth on environmental pollution: the first at a GDP per capita of 394.58 USD and the second at 2,367.5 USD. Thus, there is a nonlinear impact of economic growth on environmental pollution. This is consistent with the findings from previous studies like Ang (2008) in Malaysia, Arouri et al. (2012) in MENA countries, Hossain (2012) in Japan (Azam et al., 2016; Liang & Yang, 2019; Shurui et al., 2019) in Japan, China, and the USA. The impact of income on environmental pollution varies across different threshold regions. Specifically, if GDP per capita is equal to or less than 394.58 USD, economic growth negatively impacts the environment (-0.1378). However, if GDP per capita is between 394.58 USD and 2,367.5 USD, the negative impact is lower (-0.0601). Conversely, if GDP per capita exceeds 2,367.5 USD, economic growth positively impacts the environment (0.1134). In essence, the impact of economic growth on environmental pollution forms a U-shaped curve. In cases of U-shaped EKC, overreliance on a specific sector can lead to emissions, as indicated by Arshed et al. (2021) and Wang et al. (2021). This finding is consistent with previous studies, like Beyene and Kotosz (2020) in 12 East African countries (1990–2013), Arshed et al. (2021) with panel data from 80 countries (1990–2017), Dogan and Inglesi-Lotz (2020) in European countries (1980–2014), Wang et al. (2021) for 198 countries (1990–2018), Hassan et al. (2021) for 189 countries (1990–2018) and (Shahbaz, 2022) for 11 countries (1972–2015). This can be explained as follows: In the early stage, economic growth and pollution reduction. At low-income levels, countries often focus on agriculture and handicraft production, with low levels of resource use and pollution emissions. Production is mainly based on traditional methods, causing little harm to the environment. Due to the lack of strong industrial development, the level of pollution from production activities is insignificant. Countries in the early stages of development such as some countries in Africa and Asia have low levels of pollution because their economies are mainly based on agriculture and handicraft production. In Vietnam, in the initial development phase, Vietnam was a backward agrarian country with primitive production tools and mostly handicrafts. The main production fields were agriculture and livestock. Additionally, sparse population and abundant forests and resources meant that economic growth during this period did not impact, and even influenced environmental quality positively. In the subsequent preindustrialization phase, with the transition to a model combining agriculture and basic industries as well as the leading role of agriculture, resource utilization increased. Although the impact of economic growth on environmental pollution persisted, its magnitude decreased. These phases represent the balanced growth stage as described by Hassan et al. (2021), who found that in economies with low CO2 emissions, increasing value-added agriculture negatively impacts CO2 emissions, albeit at a low level. In high-emission economies, this impact is higher. The third phase is industrialization. In this phase, economic growth was primarily driven by heavy industries. Agriculture adopted technology and machinery, and fossil fuel energy consumption, such as gas and coal, increased. A growing population and rapid urbanization led to a substantial increase in industrial zones. This phase also witnessed strong international integration with high levels of FDI. The increase in FDI, together with advantages in access to technology and advanced techniques, also exerted considerable environmental pressure as developed countries tend to transfer ‘dirty’production 14 M.-L. THI NGUYEN AND T. L. HO technologies to developing countries like Vietnam through international investment. At the same time, as incomes and living standards increase, so does the demand for goods and services, leading to more production and consumption, putting great pressure on the environment. Consequently, economic growth in this phase correlated with increased environmental pollution. This stage represents overdevelopment according to Hassan et al. (2021). 5. Conclusion This study aims to assess the impact of fiscal policy tools on environmental pollution and reexamine the EKC hypothesis in the context of Vietnam. Utilizing data from the period 1990–2021 and employing Bayesian threshold estimation methods, our research demonstrates that both taxation and public spending exacerbate environmental degradation. An interesting finding is that economic growth has a nonlinear U-shaped impact on environmental pollution in Vietnam, which varies according to the economic structure at different stages. The findings of this study highlight several critical policy implications. Firstly, the positive correlation between tax revenue and environmental pollution underscores the need for targeted tax policy reforms. Taxation ensures the state budget revenue; hence, tax policy innovations should focus on increasing taxes on activities using nonrenewable energy sources to both generate revenue and guide production toward environmentally friendly energy use, thus mitigating environmental impact. Carbon taxes should also be implemented and monitored to enforce stricter environmental standards. Regarding government spending, the study reveals that increased expenditure contributes to higher environmental pollution. The government should consider reducing government expenditure to improve environmental quality. In 2020, public spending on the environment and climate action constituted only 1.5% of the total government expenditure, equivalent to 25.6 trillion VND, mostly allocated to solid and liquid waste management. Hence, budget allocations should be restructured to reduce unnecessary recurrent expenses and increase environmental protection spending. The government should encourage investment in renewable energy technologies without hindering the country’s energy supply and consumption. It should also promote investment incentives in renewable energy through tax exemptions and governmental subsidies. Due to the substantial infrastructural needs of the renewable energy sector, long-term infrastructure development plans funded by carbon tax revenues from fossil fuel energy use should be established. Government budget allocations could be directed to citizens and businesses to minimize environmental pollution, such as fiscal support for households and businesses using clean energy in consumption and production. In addition, state budget allocations for science and technology in environmental protection, research on clean energy technology, investment in energy-efficient infrastructure, and environmental protection should be increased for a comprehensive impact on environmental protection. Furthermore, the government could redirect budget allocations to traffic infrastructure investments, public building acquisitions, and environmentally friendly public transportation technologies. The increase in state budget allocations for universities, research institutes, and businesses to advance the application of eco-friendly technologies in the economy should be taken into consideration. In terms of the impact of economic growth on environmental pollution, our study indicates a U-shaped curve. This suggests that in an emerging nation, economic growth no longer reduces pollution as it might in an agrarian-based economy. On the contrary, growth tends to accompany increased environmental pollution when there is a shift in the economic structure toward industrialization. This highlights the viewpoint that over-reliance on industrialization can lead to environmental degradation, especially if the economy already has a low environmental quality. Policymakers in Vietnam, and emerging countries in general, should consider this issue when pursuing industrialization policies. They should prioritize the development of light industries, particularly if the national air quality index is low. What is more, the process of transitioning the economy toward services should be given more attention, as service sectors typically have less environmental impact. Finally, pursuing the development of the agricultural sector shows increased environmental quality due to its role in forming carbon sinks. Developing sub-sectors of agriculture, including afforestation, would capture free CO2 in the atmosphere. This study has some limitations that should be addressed in future research. The analysis focused primarily on the relationship between fiscal policies and environmental outcomes in Vietnam, which may COGENT ECONOMICS & FINANCE 15 not be generalizable to other contexts without additional validation. Future studies should consider a broader range of countries to compare different policy impacts and effectiveness. Furthermore, the study identified a U-shaped relationship between economic growth and environmental pollution, indicating that economic development initially reduces pollution but can later increase it as industrialization progresses. Future research should explore this dynamic further, examining how different stages of industrialization and economic development impact environmental quality. It would be beneficial to investigate the effects of specific industrial sectors and their environmental impacts, as well as the role of service-oriented and agricultural sectors in improving environmental conditions. Additionally, future studies should analyze the long-term impacts of fiscal policies on environmental quality and explore how evolving economic structures, such as the transition to a service-based economy or increased focus on sustainable agricultural practices, influence environmental outcomes. This approach will provide a more comprehensive understanding of how economic and fiscal policies can be aligned to support sustainable development and improve environmental quality. Notes 1. The EAGLES are a group of 15 emerging economies identified by Banco Bilbao Vizcaya Argentaria (BBVA) Research, expected to outpace advanced economies in growth and development. These countries, including China, India, Indonesia, Mexico, Nigeria, the Philippines, Iran, Pakistan, Russia, Turkey, Egypt, Brazil, Bangladesh, Malaysia, and Vietnam, play a key role in global trade and foreign direct investment due to their rapid industrialization and increasing global influence. 2. https://ghdx.healthdata.org/gbd-2019 3. https://www.worldbank.org/en/news/press-release/2016/09/08/air-pollution-deaths-cost-global-economy-225-billion Acknowledgement The authors are supported by the University of Finance-Marketing, Viet Nam. Author contributions Thi Lam Ho: Preparing and processing data, Writing the original draft. My-Linh Thi Nguyen: Writing, reviewing and editing the final version. Disclosure statement No potential conflict of interest was reported by the author(s). Funding The authors received no direct funding for this research. About the authors My-Linh Thi Nguyen is an Associate Professor at the Faculty of Banking and Finance, University of Finance and Marketing (UFM), Vietnam. The main areas of research are public finance, corporate finance, the real estate market, financial development, and sustainable development. With 20 years of experience in research and teaching in the field of finance, she has published many international articles. In addition, she has led many ministerial and provincial projects in Vietnam, participating in projects at the National Foundation for Science. She is the author and coauthor of many books including textbooks and monographs. Thi Lam Ho is a lecturer at the University of Finance - Marketing, Vietnam. Her research areas include Applied Economics, Environmental Economics, Energy Economics, Quantitative Finance, International Finance, Macroeconomics and Econometrics. 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