Debt Sustainability: Can EU Member States Use Environmental Taxes to Regain Fiscal Space?

Abstract

The COVID-19 pandemic has taken its toll on the economies of the EU member states. While policymakers have been faced with rising government spending in an effort to combat the health crisis, this has led to unprecedented levels of government debt and budget deficits. Debt sustainability has been severely affected by decreasing fiscal space, and there are significant concerns that a debt crisis is looming on the horizon for the EU. The current study aims to analyze environmental taxes as a potential solution for rebuilding fiscal space and thus improving debt sustainability in the EU. The research method used to study the impact that the four types of environmental taxes may have on fiscal space is the dynamic panel regression model, estimated using the Generalized Method of Moments (GMM). The conclusions show that all four categories of environmental taxes can help the EU member states regain fiscal space and improve their debt sustainability. The research results show that the strongest positive impact on fiscal space will be achieved by energy taxes and transport taxes.