Investigating the effects of environmental taxes on economic growth: Evidence from empirical analysis in European countries

Abstract

This paper empirically analyze the effects of environmental taxes on economic growth using data spanning the period 2009–2019 across 31 European countries (28 from the European Union, including the UK before Brexit, Iceland and Norway, which are candidates to join the EU, and Switzerland). The selected countries are also members of the European Environmental Agency countries (EEA-32). Baseline scenario with Pooled Ordinary Least Squares leads to the evidence that an increase of the environmental taxes in case of any tax policy reform will exacerbate economic growth. Robustness checks by introducing more control variables in response to omitted variables bias, coupling with GMM estimations that control for endogeneity concerns, consistently confirm the results. Deeping more with quantile analysis regression, a negative effect is confirmed in each quantile, and the results are significant at 1%. Nevertheless, there is a discrepancy between each quantile that allows highlighting evidence of countries’ threshold effects. In fact, low-income countries are more negatively affected than upper and medium-income countries. As the official communication of the EU Commission is always in demand of empirical research concerning the economic impacts of environmental policy instruments, the paper sheds light on the possibility of discussing and adapting the EU strategy based on a harmonization system. This evidence of differentiated effects among countries’ thresholds in the absence of any compensation may raise equity considerations within heterogeneous countries. Therefore, this paper fulfills the gaps in the inconclusive results in the existing literature. AcknowledgmentsAuthors would like to sincerely thank Ange Jusse Tchouto, Isaac Ketu, Arsene Mouongue Kelly for their invaluable support in this work, their helpful comments and suggestions on the previous draft of this paper. The usual disclaimer apply and views are the sole responsibility of the authors.