The determinants and the effects of the environmental taxation in european countries

Abstract

The economic growth has always been associated with increasing use of energy and resource. The countries around the world continue to advance economically and, in this way, they put a strain on the ability of the natural environment to absorb the high level of pollutants that are created as a part of this economic growth. Therefore, solutions need to be found so that the economies of the world can continue to grow, but not at the expense of the public good. In the world of the economics, the amount of environmental quality must be considered as limited in supply and, therefore, it must be treated as a scarce resource. This is a resource to be protected. Taxes are the most important used economic instruments available to deal efficiently with pollution and thereby help to protect the environment. In the last ten/twelve years, a growing number of European countries implemented the Environmental Tax Reform (ETR). The Reform refers to “changes in the national tax system where the burden of taxes shifts from economic functions, sometimes called “goods”, such as labour (personal income tax), capital (corporate income tax) and consumption (VAT and other indirect taxes), to activities that lead to environmental pressures and natural resource use, sometimes called “bads”. Therefore, ETR can provide two benefits: the environmental benefit from charging the full cost of environmental resources, and the economic benefit from the reduction in other distortionary taxes. The reform is thus said to offer the possibility of a “double dividend”: it would improve not only the environment but also the economy as a whole. III The main concern of the present work is to analyze the determinants and the effects of the environmental taxation in European countries. Specifically, the research questions are: - Which institutional and governmental factors affect the level of environmental taxation? Understanding the determinants of the environmental taxation could yield a more efficient taxation system. - Is the environmental taxation effective in reducing the pollution levels? (First Dividend). - Is there a tax-shifting between environmental and labour taxes? Moreover, is there an employment gain? (Second Dividend). The thesis is introduced in Chapter 1, which outlines the context, the motivation and the aim of this research. Chapter 2 examines the determinants of the environmental taxation using a panel dataset of 22 European countries for the period from 1996 to 2012. The analysis searches for the environmental taxation determinants by concentrating on three groups of factors. The first group includes the variables responsible for consumption and production processes; the second group refers to the factors that reflect environmental quality; the indicators of the quality of governance are included in the third group. The countries of the sample, in turn, are also divided into three groups in order to highlight the heterogeneity existing of European economies depending on the degree of economic development, environmental awareness and quality of institutions. Findings suggest that in order to apply environmental taxation policy, countries should take advantage of the interrelationship between the IV economic growth and the institutional enforcement; in other words, the connection between economic development and environmental awareness inevitably requires the application and enforcement of functional environmental policies. Chapter 3 analyzes the effectiveness of environmental taxes and the other climate change policies and measures, such as feed in tariff, green certificates and loans. Using a panel dataset that covers 22 European countries over the period 2001-2012, I estimate an OLS and an Arellano–Bover’s (1995) two-step dynamic panel approach to verify whether the environmental tools and the introduction of the Environmental Tax Reform have a significant impact in improving environmental quality. Results show that the environmental taxes, the climate change direct investments and fiscal and financial incentives have an important role in reducing pollution levels. The introduction of the Environmental tax reform, also, has a high effect in improving environmental quality. Chapter 4 verifies the existence of the “second dividend”. The aim of the chapter is to determine if increasing environmental taxes can reduce other distortionary taxes, in particular labour tax. Depending on which taxes rates are cut and the specific country considered, the second dividend could generate cuts in labor taxes and, therefore, employment gains. I use a panel dataset that covers 22 European countries over the period 2000-2012 to investigate whether the environmental tax affects the labour tax burden and, consequently, the unemployment rate. I handle endogeneity problems through an instrumental variable approach. Results show that environmental taxation has a significant impact on labour tax, but no impact on V unemployment levels.