When Neighbours Matter: Asymmetries in Environmental Tax Responses Driven by Regional Context

This paper explores the asymmetric nature of spatial interactions in environmental taxation. The analysis focuses on the intermediate level of government in Spain—namely, the regions—and is based on an extended dynamic spatial Durbin model. While the initial results confirm the existence of spatial dependence—where regions tend to imitate their neighbours’ revenue-based measure of environmental tax stringency—the extended model, which interacts the spatial lag of the dependent variable with an index capturing the characteristics of neighbouring regions, reveals that this imitation is far from uniform. Specifically, regions tend to emulate the environmental tax behaviour of the neighbouring regions when these are prosperous but choose to behave differently when the neighbouring economies are poorly developed, with sluggish or stagnant markets. In this scenario, they opt for tax competition to attract firms. Moreover, tax interaction is minimal when neighbouring regions have very low environmental tax revenues or have a minority government. These findings challenge uniform approaches to environmental tax coordination and highlight the need for strategies that account for regional heterogeneity.