Is environmental tax an enabler of circularity: new insights from the unique database.

Abstract

This paper provides answers to the question that the environmental tax enables the circular economy. By employing six diverse measures to reflect circularity (namely the amount of municipal waste, the number of circularity patents, the amount of circular material used, the rate of recycling waste, the rate of recycling biowaste, and the rate of recycling e-waste) and four measures of environmental tax (namely total environmental tax revenue, energy tax revenue, pollution and resource tax revenue, and transportation tax revenue) of European countries, our article provided a comprehensive analysis of the nexus between environmental tax and circularity performance. A panel-corrected standard errors (PCSE) model and a feasible generalized least square estimates (FGLS) model are employed to study this association, while the dynamic fixed effects (DFE) estimator is applied to the autoregressive distributed lag (ARDL) method to measure both the short-run and long-run effects. Our study reveals the heterogeneous effects of an environmental tax on circularity. Taxing on the energy sector, the polluted sector, and transportation stimulate the process of circularity. Notably, our estimation results reveal that environmental tax can enable European countries to transit to a circular economy, especially in the long term. Our findings are critical for economists and policymakers in using the tax as an effective tool to promote a country's circularity performance.