Impact of environmental fiscal reforms on carbon emissions of EURO-4 countries: CS-NARDL approach

Abstract

This study investigates the effects of the Environmental Fiscal Reforms (EFR) policy on carbon emissions of the top 4 economies of Europe, using annual time series data from 1995 to 2022. The study used a cross-sectional nonlinear autoregressive distributed lag (CS-NARDL) model to examine the relationship. Estimates claim that the variables have an asymmetric long-term and short-term relationship. The negative impacts of carbon taxes on carbon emissions prove that emissions are reduced when polluting activities are taxed. Fiscal policy instrument such as taxation changes the behaviour of the private sector by disincentivizing polluting activities. On the other hand, government expenditure on environmental protection encourages the private sector to embrace and invest in green technologies, decreasing carbon emissions. The ECM term is negative and statistically significant at a 1 percent significance level for CS-NARDL model, implying a stable long-run relationship between variables. It demonstrates that short-run disequilibrium converges to long-run equilibrium at a speed of 47.2 percent. The study also propels new insight into the effectiveness of EFR policy, showing that taxes act as a counter-incentive and expenditure as a positive policy intervention for reducing carbon emissions. EURO-4 countries set an example for policymakers worldwide by rebalancing their energy mix and expanding the use of cleaner alternative energy sources.

Keywords

• CS-NARDL
• Environmental fiscal reforms
• Carbon tax
• Environmental spending
• Economic growth
• Industrial growth