ENVIRONMENTAL TAXES AND GROWTH-EMISSION TRADE-OFFS: EVIDENCE FROM THE EUROPEAN UNION.

Abstract

Reconciling environmental objectives with economic growth remains central to the European Union’s pursuit of climate neutrality. This study investigates the heterogeneous effects of environmental taxes on green economic growth across 21 EU countries from 2005 to 2022. Unlike previous studies that overlook cross-country and growth-level heterogeneity, this paper employs quantile-based estimators, the Panel Quantile Autoregressive Distributed Lag (PQARDL) model and the Panel Quantile Regression with Non-Additive Fixed Effects (QRPD) estimator, to capture both short- and long-run dynamics across the growth distribution. The results reveal asymmetric effects: environmental taxation exerts a more pronounced and positive impact on growth in lower-growth (low quantile) economies, where environmental inefficiencies are higher and taxes are less distortionary. Conversely, the marginal benefits diminish in higher-growth (upper quantile) economies, suggesting possible saturation or adjustment costs. These findings underscore the importance of recognising heterogeneity when designing and implementing fiscal instruments for environmental sustainability. Policy implications highlight the need for growth-compatible environmental tax frameworks that are complemented by strategic investments in both human and physical capital. Such an approach can enhance the EU's ability to achieve its long-term climate and economic objectives without compromising competitiveness. By integrating quantile-based evidence into the policy process, this paper advances the empirical understanding of how environmental taxation can reconcile growth and emission objectives within the EU context.