The law of diminishing returns in climate policy: Conditional effectiveness of fossil fuel taxes in OECD countries

This study investigates the conditional effects of fossil fuel-related taxes on CO₂ emissions across 38 OECD countries from 2008 to 2022 by the moderating roles of GDP per capita and energy-related green innovation, specifically testing the hypothesis of diminishing returns in OECD fixed panel analysis. After validating the environmental Kuznets curve, it reveals that the mitigation effect of fossil fuel taxes exhibits diminishing marginal returns. Additionally, higher GDP per capita significantly erodes the carbon-reducing efficacy of taxation, also observed for green innovation. Beyond approximately $14,000 GDP per capita, the tax’s marginal effect weakens and becomes statistically insignificant. This implies that while fossil fuels taxation is an effective early-stage tool, most OECD economies cannot rely on taxation alone.