Do Environmental Taxes Affect Carbon Dioxide Emissions in OECD Countries? Evidence from the Dynamic Panel Threshold Model

Abstract

The latest decades have been marked by rapid climate change and global warming due to the release of greenhouse gas emissions into the atmosphere. Environmental taxes have emerged as a cost-effective way to tackle environmental degradation. However, the effectiveness of environmental taxes in reducing pollution remains a topic of ongoing debate. The purpose of this paper is to examine empirically the effects of various environmental tax categories (energy, pollution, resource and transport) on CO2 emissions in 34 OECD countries between 1995 and 2019. The dynamic panel threshold regression developed by Seo and Shin (2016) is implemented to assess whether the impact of environmental taxes on CO2 emissions depends on a given threshold level. The locally weighted scatterplot smoothing analysis provides evidence for a nonlinear association between environmental taxes and CO2 emissions. The analysis indicates the existence of one significant threshold and two regimes (lower and upper) for all environmental tax categories. The dynamic panel threshold regression reveals that the total environmental tax, energy tax and pollution tax reduce CO2 emissions in the upper regime, i.e., once a given threshold level is reached. The threshold levels are 3.002% of GDP for the total environmental tax, 1.991% for the energy tax and 0.377% for the pollution tax. Furthermore, implementing taxes on resource utilization may be effective but with limited environmental effects. Based on the research results, it is recommended that countries in the OECD implement specific environmental taxes to reduce greenhouse gas emissions.