Environmental protection public expenditure as a determinant of green total factor productivity: Evidence from the European Union

Abstract

We investigate the relationship between environmental protection public expenditure (EPE) and green total factor productivity (GTFP) across 27 EU countries from 2013 to 2022. Using the global Malmquist Luenberger index and Two-Step System GMM estimation, we test contemporaneous and lagged effects of EPE scale and structure on GTFP. The findings reveal that absolute EPE (EPEA) has a positive and significant effect on GTFP through pollution-emission reduction and clean-technology investment channels. However, expenditure intensity (EPEI) shows no significant effect. This points to a threshold issue: current spending (averaging 0.76% of GDP) likely falls below levels needed for measurable productivity gains. Neither one-period nor two-period lagged variables demonstrate significant relationships with GTFP, indicating that environmental spending impacts may require longer evaluation horizons than the observation period allows. Disaggregated analysis of individual EPE components reveals no significant effects for any single category, suggesting that integrated environmental strategies may be more effective than targeted categorical spending. Several limitations affect our findings. We cannot establish definitive causality. The observation period is relatively short. Our focus on public expenditure excludes private environmental investment. Our empirical findings suggest four policy priorities: prioritising absolute investment over intensity targets, integrating spending across categories, extending evaluation beyond 2-year horizons, and strengthening public-private coordination.