Can environmental and fiscal policy effectively curb environmental degradation? The threshold role of geopolitical risk

Addressing climate change as the global challenge necessitates formulating stringent environmental and fiscal policies to achieve sustainable economic development. This paper applied FMOLS method to assess how environmental policy stringency and fiscal policy influence environmental degradation based on panel data in the G7 and E7 countries during 2000 to 2020. Additionally, a panel threshold model was employed to analyze the influence of geopolitical risk on the effectiveness of environmental policy. The results demonstrate heterogeneity in the impact of different policies on environmental outcomes. Stricter environmental regulations exhibit a lasting positive influence on environmental quality within the G7 countries, effectively reducing the ecological footprint. Conversely, in the E7 countries, environmental policy stringency correspondingly increases the ecological footprint. Tax revenue and government expenditure both have significant negative effects on environmental degradation in the G7 countries, with tax revenue proving more effective. In the E7 countries, government expenditure plays a stronger role in inhibiting environmental degradation than tax revenue. Moreover, geopolitical risks enhance the mitigation ability of environmental policies on ecological footprint in the G7 countries, while exacerbating the damage effect in the E7 countries. Based on these findings, policy recommendations are proposed.