The Effect of Taxation on Greenhouse Gas Emissions

Abstract

This paper examines the effect of governmental environmental taxes on greenhouse gas (GHG) emissions using a panel data set of 19 EU countries for the time period 1995-2010. We estimate both direct and indirect effects of governmental environmental taxes on GHG emissions in industrial processes. The indirect effect in particular operates through the effect of environmental expenditure for reduction of GHG emissions in industry. To take into account the dynamic nature and to properly address the potential endogeneity, adequate econometric methods are applied. We have shown that the direct effect of environmental taxes on GHG emissions is negative, while the indirect effect through environmental expenditures is also negative and even more statistically significant. Consequently, some policy implications may be derived from the results.