Stochastic and club convergence analysis of environmental tax revenues across EU countries.

Abstract

The European Union (EU) has taken several initiatives over the past two decades to harmonize environmental taxation policies across member countries. The directive on energy taxation (Directive 2003/96/EC) provides the framework for the taxation of energy products within the EU. These harmonization efforts are part of a broader strategy to ensure environmental sustainability and combat climate change. This paper examines whether these efforts have had any impact on the convergence of environmental taxation across EU countries during the period 1995-2021. This paper uses a new panel unit root test that accounts for cross-correlations and structural breaks within the panel since regulations on taxation increase the possibility that EU countries may have commonalities on these issues. The club convergence test is also used to test for the existence of multiple equilibria within groups of countries. The results of the traditional convergence test show that environmental tax revenues are converging across EU countries. Furthermore, the results of the stochastic convergence test indicate that there is a convergence of relative environmental tax revenues. As for the break dates, the results from the tax revenue series show that the first and second break are concentrated in the periods 2002-2007 and 2012-2017, respectively. Finally, the results of the club convergence test reject the full panel convergence and reveal the existence of different convergence clubs. The empirical results of this paper have some implications for environmental taxation in the EU.