Does the Quality of Political Institutions Matter for the Effectiveness of Environmental Taxes? An Empirical Analysis on CO2 Emissions

Abstract

Focusing on a sample of 39 countries in the period 1996–2017, we analyze whether the relationship between environmental taxes and CO₂ emissions depends on the quality of political institutions. Our results show that an increase in the environmental tax revenue is related to a reduction in CO₂ emissions only in countries with more consolidated democratic institutions, higher civil society participation, and less corrupt governments. Moreover, the relationship between CO₂ emissions and revenue neutral shifts to different tax sources depends not only on the quality of political institutions, but also on the kind of externality the policymaker aims at correcting.