Pollute less or tax more? Asymmetries in the EU environmental taxes – Ecological balance nexus

Abstract

This paper examines the impact of environmentally related taxes on environmental performance in the EU-15 countries during the period of 1995–2016 by utilizing an innovative non-linear model, which is the panel smooth transition regression (PSTR) model. Although the effectiveness of environmental taxes has been discussed before, the potential effects of these taxes on ecological balance sheets as a measure to reflect human pressures on the environment/ecosystem have not been fully investigated. This paper, therefore, deals with total ecological balance and its main components, which are based on the major types of ecologically productive areas such as cropland, grazing land, forest area, and fishing grounds. The results indicate that revenues from environmentally-related taxes as a share of GDP significantly lower the ecological deficits after exceeding a certain threshold level, but not cropland balance accounts. Thus, well-designed environmental taxes on the optimal level have the potential to reduce environmental problems/ ecological imbalance, if not implemented in conjunction with policies such as tax exemptions, refunds or tax allowances that limit their impact.