Environmental Tax Reform and the European Green Deal: Empirical Evidence from Panel Data Analysis

Abstract

The European Green Deal, the European Union's roadmap for a green transition, was launched in 2019. With this strategy, the European Union aims to stop carbon emissions by 2050 through green policies in many sectors, especially in the energy sector. The European Union also uses various environmental tax instruments to achieve this goal. Environmental taxes, one of these instruments, are considered to have a regressive effect on employment and welfare, especially in carbon-intensive industries. In order to mitigate these negative social and economic impacts of the green transition, the European Union has implemented the Just Transition Mechanism. However, it is not known whether the Just Transition Mechanism will be sufficient after the newly introduced regulations such as the plastic tax, the Energy Tax Directive, and the Carbon Border Adjustment. This study conducted a panel data analysis covering the period between 1994-2020 to analyze the impact of environmental taxes on employment. In this panel of 29 European countries, the dependent variable is the unemployment rate while independent variables are environmental taxes, gross domestic product, renewable energy supply and energy efficiency. As a result of this analysis, it is concluded that environmental taxes have an increasing effect on unemployment. Therefore, based on the panel data analysis, it is concluded that the Environmental Tax Reform package, which will provide double dividend in terms of both environmental and employment, should be implemented in addition to the Just Transition Mechanism.