Towards full decarbonization: does environmental tax and renewable energy matters in developing countries?

Abstract

ABSTRACT Despite the role of energy in growth and development, the consumption of fossil fuel rises the global temperature, which poses a significant threat to the full decarbonization agenda of the global community. This study examines the impact of environmental tax and renewable energy on the full decarbonization of 25 developing countries with data from 1993 to 2019. The study used DCCE and CS-ARDL estimators, and the results revealed that environmental tax and renewable energy promote full decarbonization. Moreover, the evidence indicates the validity of the environmental Kuznets curve (EKC) in developing countries, with a turning point at 2.56 in the DCCE to 1.44 in the CS-ARDL. Also, the findings confirmed financial development's role in enhancing renewable energy's impact on full decarbonization in developing countries. Therefore, of this study confirmed the ‘double dividend’ hypothesis that environmental tax policy can mitigate CO2 emissions, correct ecological externalities, and generate revenue. Policymakers in developing countries should strive to undertake tax reform to achieve efficient tax system. In addition, they should formulate and enforce effective environmental tax policies to accelerate full decarbonization and achieve SDGs. Also, massive investment should be channeled to renewable energy projects to provide affordable and cleaner energy, to minimize the consumption of fossil fuel.