The effectiveness of environmental taxes on CO2 emissions: an empirical analysis of European countries.

Abstract

Environmental issues are an increasing concern, for our present and future generations. Today, the main governmental tool used to fight against pollution in our economies is environmental taxation, used in various ways and in different proportions by each country. However, only a few studies have been conducted with concrete evidence at the European level. Therefore, this Master’s thesis16 presents an empirical analysis of the effectiveness of transport, pollution and resources, and energy taxes on the level of CO2 emissions in Europe. The System Generalized Method of Moments is used in an incremental method, additional explanatory variables being included successively. For this purpose, national data on 32 countries over 25 years, from 1995 to 2019, are employed to empirically estimate the relationship between taxes and CO2, while controlling for variables such as GDP, the percentage of energy coming from a renewable source or industrial production. Among the results, it can be observed that environmental taxation indeed negatively impacts the CO2 emissions, as evidence is shown that an increase in transport, pollution or energy taxation reduces CO2 emissions. Coefficients show strong level of statistical significance at the 1% level, meaning that results can be trusted with respect to the data used for the analysis. Therefore, policy recommendations are in order and are ultimately presented at the end of this paper.