The moderating role of environmental tax and renewable energy in CO2 emissions in Latin America and Caribbean countries: Evidence from method of moments quantile regression

This paper investigates the effectiveness of environmental tax and renewable energy in mitigating CO2 emissions in 18 Latin America and Caribbean (LAC) countries for the period 1994–2018 after controlling for financial development, non-renewable energy and economic growth. We applied the recently novel panel Methods of Moments Quantile Regression (MMQR) with fixed effects, and to rigorously analyze the hypothesized relationship, we also applied a number of other conventional estimators including the augmented mean group (AMG), the Dynamic Ordinary Least Squares (DOLS) and the Driscoll and Kraay estimators. Our evidence shows that the effect of environmental tax and renewable energy on CO2 emissions is heterogeneous with significant negative effect in higher emissions countries but insignificant effect in lower emission countries. Results from MMQR together with the other estimators show that environmental tax and renewable energy can reduce CO2 emissions with the mitigation effect of renewable energy considerably higher than that of environmental tax. Granger causality test also reveals that environmental tax and renewable energy unidirectionally cause CO2 emissions. We also found that environmental tax not only reduces CO2 emissions but it also promotes renewable energy. The evidence indicates that environmental tax and renewable energy can be effective instruments for promoting environmental quality in LAC. Environmental sustainability in these countries can be promoted by increasing environment tax, investing in renewables and reducing non-renewable energy consumption.