Environmental fiscal policy and greenhouse gas emissions in the EU-27: Evidence from a dynamic panel GMM model

Abstract

This paper examines the effects of environmental fiscal policy variables on greenhouse gas (GHG) emissions in the EU-27 from 2009 to 2023. The Arellano and Bond difference GMM estimator is used to address potential endogeneity and persistence of GHG emissions. The panel model is estimated using the total GHG emissions as the dependent variable, while energy taxes, transport taxes, and government environmental protection expenditure serve as independent variables. The results indicate significant persistence in GHG emissions. Energy taxes and government environmental protection expenditure have a negative and statistically significant effect on emissions in both the short run and the long run, confirming the effectiveness of these fiscal instruments in reducing emissions. However, transport taxes show a positive and significant relationship with emissions, suggesting that their current structure, which is linked primarily to vehicle ownership rather than fuel consumption, is not effective in reducing emissions. Robustness checks using population as a control variable and CO$_2$ emissions as an alternative dependent variable confirm the stability of these results. The findings suggest that energy taxes and environmental expenditures are effective fiscal instruments for reducing emissions in the EU, while the design of transport taxes requires reconsideration to improve their environmental effectiveness.