Asymmetric effect of environmental tax on CO2 emissions embodied in domestic final demand in South Africa: A NARDL approach

Abstract

Motivated by the pressing need to address environmental concerns, this study explores the relationship between environmental taxes and CO₂ emissions embodied in domestic final demand in South Africa. The study uses a non-linear autoregressive distributed lag (NARDL) model to analyse the asymmetric impact of environmental taxes. Results indicate that environmental taxes have an asymmetric impact on CO₂ emissions embodied in domestic final demand in both the short and long runs. Specifically, both positive and negative shifts in environmental taxes are linked with a respective 0.06% decrease and a more pronounced 0.22% decrease in CO₂ emissions embodied in domestic final demand. Moreover, positive shocks in the GDP growth rate are associated with an approximately 0.002% uptick in CO₂ emissions, while negative shocks lead to a 0.012% decrease. Additionally, both positive and negative shocks in population growth exhibit a significant positive correlation with the response variable. The baseline estimates demonstrate that the joint effect of environmental taxes and the GDP growth rate is correlated with reductions in CO₂ emissions embodied in domestic final demand. Similarly, the joint influence of environmental taxes and population growth rate is linked to declines in CO₂ emissions. The study highlights the practical policy implications of these findings.