Green finance and clean taxes are the ways to curb carbon emissions: An OECD experience

Abstract

The rising carbon dioxide emissions pose a significant threat to environmental sustainability. The attention, once primarily on production-based emissions, has recently shifted towards consumption-based carbon (CCO2) emissions. While much of the existing literature focuses on production-based impacts, the interplay between green finance, environmental taxes, and CCO2 emissions is yet to be comprehensively explored. To address this knowledge gap, our study investigates the dynamics of these variables across 21 OECD economies from 1990 to 2020, also considering trade activities and economic growth. We employ the second-generation unit root test and methodologies to manage cross-sectional dependence and slope heterogeneity, establishing cointegration among the variables of interest. Applying an innovative quantile regression method adapted for non-normal data distribution, our results highlight economic growth and imports as major drivers of CCO2 emissions, with exports, green finance, and environmental taxes serving as substantial mitigating forces. This pattern remains consistent across all quantiles. Our analysis reveals a unidirectional influence of trade on CCO2 emissions, with bidirectional causality observed between economic growth, green finance, environmental taxes, and CCO2 emissions. In light of our findings, we recommend fostering green finance and levying environmental taxes in industries with high pollution output as key strategies for advancing environmental sustainability.