Do environmental taxes and environmental stringency policies reduce CO2 emissions? Evidence from 7 emerging economies

Environmental tax and environmental policy stringency are becoming central policy instruments for combating environmental degradation but there is a lack of studies that assess their combined effectiveness in mitigating emissions especially for emerging economies. We address this important gap by assessing the effectiveness of these two policy instruments in reducing CO2 emission in a panel of 7 emerging economies for the period 1994-2015. We believe that this is the first attempt to apply these two important policy instruments in the same framework for testing their effectiveness in reducing CO2 emissions in these 7 emerging economies. We apply heterogeneous panel data considering cross-sectional dependence and slope heterogeneity tests by using the Augmented Mean Group (AMG) which is efficient and unbiased and produces consistent estimates. We found an inverted U-shaped relationship between CO2 emissions and environmental policy stringency suggesting that it takes time for environmental policy stringency to be effective. We also found unidirectional causality running from environmental policy stringency to CO2 emission. CO2 emission was negatively and significantly related to total environmental tax with causality running from total environmental tax to CO2 emission thus supporting the green dividend hypothesis of improving environmental quality. In contrast, CO2 emission and energy taxes were not causality related but CO2 emission was negatively and significantly related to energy taxes. Robustness checks using the FMOLS also show that both environmental policy stringency and environmental taxes can be effective in mitigating CO2 emissions.

Automated summary

Environmental tax and policy stringency are becoming central policy instruments for reducing CO2 emissions, with a study on 7 emerging economies from 1994-2015 showing their effectiveness. There is an inverted U-shaped relationship between CO2 emissions and environmental policy stringency, indicating the time needed for effectiveness, as well as a unidirectional causality running from policy stringency to CO2 emissions. The study also found a negative and significant relationship between CO2 emissions and total environmental tax, supporting the green dividend hypothesis.