Linking green fiscal policy, energy, economic growth, population dynamics, and environmental degradation: Empirical evidence from Germany

Abstract

Green fiscal policy instruments have been considered among the most effective against climate change and environmental conservation. However, there is limited knowledge of whether green fiscal policy instruments create the desired results. The primary objective of this research is to examine the impact of green fiscal policies in achieving environmental sustainability for the period from 1995 to 2020. To this end, Germany is utilized as a research sample, which commonly practices fiscal instruments to internalize negative economic development externalities. Besides, various control variables, including energy consumption, energy innovations, economic growth, and population density, are incorporated into the empirical model. The Autoregressive Distributed Lag approach is used as the baseline estimation method, while Fully Modified Least Squares and Canonical Regression methods are used for robustness check. The empirical outcomes show that (i) environmental taxes do not serve as an effective green fiscal policy tool, (ii) energy use exacerbates environmental pollution, (iii) economic growth and population density reduce environmental pollution, (iv) the impact of energy innovations on environmental pollution is controversial. Therefore, policymakers in Germany should not rely on environmental taxes as a green fiscal policy tool for combating climate change.