The lay abstract featured today (for Does the Quality of Political Institutions Matter for the Effectiveness of Environmental Taxes? An Empirical Analysis on CO2 Emissions by Donatella Baiardi and Simona Scabrosetti is from Environmetrics, with the full Open Access article now available to read here.

Abstract

This paper examines whether and how the relationship between environmental taxes and CO₂ emissions is influenced by the quality of political institutions.

The central idea is that a well-established democracy, active civil society participation, and a corruption-free culture are prerequisites for the effectiveness of environmental taxes. In fact, environmental taxes are a key tool for reducing environmental degradation and thus constitute the core environmental strategy of many developed and developing countries, especially after the Paris Agreement of 2015.

Using a sample of 39 countries in the period that goes from 1996 to 2017, this empirical analysis reveals that in countries with strong political institutions—i.e., where democracy is well-consolidated, civil society is engaged, and government is not corrupt—increasing environmental tax revenue is associated with a reduction in CO₂ emissions. On the contrary, in countries with weak political institutions-i.e., where democracy is not well-established, civil society is not active, and government is corrupt-, a rise in environmental taxes is related to an increase in CO₂ emissions.

Furthermore, this study emphasizes that both the structure of environmental tax revenue and the specific environmental domain targeted matter. More precisely, revenue-neutral shifts toward different environmental tax sources, aimed at addressing particular environmental externalities, may have varying relationships with the level of CO₂ emissions, even for the same quality of political institutions.

Policymakers would be wise to consider all these implications when linking tax revenue and tax structure to environmental goals.