Environmental Performance and Carbon Emissions: Revisiting the Role of Environmental Taxes and Policy Stringency for OECD Countries

Effectively combating climate change is a critical objective in the twenty-first century, with rising global temperatures, extreme weather events, and environmental degradation having severe social and economic consequences, necessitating urgent policy actions. The current study examines the impact of environmental taxes and environmental policy stringency on CO 2 emissions in OECD countries, utilizing a balanced panel dataset of 32 OECD countries from 2000 to 2022. Additionally, this study incorporates key control variables, including renewable energy consumption, economic growth, financial development, urbanization, and human capital, to provide a comprehensive analysis. The empirical results reveal that 1% increase in environmental taxes leads to a 0.119% reduction in CO 2 emissions, while a 1% increase in environmental policy stringency results in a 0.040% decrease in CO 2 emissions. Renewable energy significantly reduces emissions, whereas urbanization contributes positively to CO 2 emissions. Using system GMM for robustness tests shows that environmental taxes and strict environmental policies can effectively improve the quality of the environment in OECD countries. Moreover, we categorized 32 OECD countries into two groups to address potential heterogeneity: low-emitting countries and high-emitting countries. Our empirical findings of these groups are consistent with the overall results. Finally, our empirical results support the EKC hypothesis by confirming an inverted U-shaped relationship between economic growth and CO 2 emissions across all models. Thus, we concluded that environmental taxes and strict environmental policies have a significant impact on CO 2 emissions among OECD countries.