Does the implementation of a Pigouvian tax be considered an effective approach to address climate change mitigation?

Abstract

This paper investigates the viability of environmental taxes as a means to mitigate greenhouse gas emissions within the European Union (EU) using the panel threshold model on two balanced panel data comprising countries from the European Union: the Northern and Western countries and Southern and Eastern countries for the period 2000–2020. The study's empirical results support the Pigouvian theory for developed countries, as they indicate an optimal minimum threshold for environmental taxes, where these taxes effectively contribute to reducing greenhouse gas emissions. However, the results diverge for emerging countries, revealing a maximum threshold for environmental taxes beyond which their impact in curbing emissions diminishes. To achieve the ambitious goal of climate neutrality, policymakers must adopt a comprehensive and diversified approach. This includes a combination of environmental taxes, more stringent regulations, and emission standards for industries. Additionally, the implementation of carbon pricing mechanisms, promotion of investments in sustainable fuels and technologies, and the establishment of low-carbon emission infrastructure are essential components of this strategy. By integrating these various measures, policymakers can better navigate the path toward climate neutrality and effectively combat climate change in the EU and beyond.