Environmental taxes, CO2 emissions, and economic growth: evidence on the moderating role of institutional quality in developing countries

Purpose This study examines the heterogeneous effects of environmental taxes and carbon dioxide (CO2) emissions on economic growth and investigates whether institutional quality conditions these relationships across developing economies. Design/methodology/approach Using an unbalanced panel dataset of 55 developing countries during 2010–2022, this study applies panel quantile regression and conducts robustness analyses using alternative estimation approaches. Findings First, environmental taxes negatively affect economic growth, with stronger adverse effects at higher growth quantiles. Second, CO2 emissions exhibit a positive and relatively stable association with economic growth, suggesting continued dependence on carbon-intensive production structures. Third, institutional quality strengthens the negative effect of environmental taxes at lower growth levels but mitigates this effect at higher growth levels. Finally, institutional quality weakens the positive relationship between CO2 emissions and economic growth across growth distributions. Research limitations/implications This study provides theoretical insights into how institutional quality shapes the growth effects of environmental taxation and environmental pressure across different growth conditions. Practical implications The findings suggest that improving institutional quality may help reduce the economic costs associated with environmental taxation while supporting more balanced economic and environmental policy implementation in developing economies. Originality/value This study extends the literature by demonstrating that the economic effects of environmental taxation and environmental pressure are not uniform across growth conditions but depend on institutional quality, thereby providing new evidence on the institutional conditions under which environmental policies influence economic growth.