THE EFFECTIVENESS OF PIGOUVIAN TAXES IN REDUCING CARBON EMISSIONS

Pigouvian-type environmental/carbon taxes, which aim to internalize negative externalities in the fight against global warming and climate change, are among the important policy tools. The aim of this study is to examine whether environmental taxes are effective in reducing CO₂ emissions in a sample of G7 countries. The analysis covers the period 1994–2014 due to the accessibility of environmental tax data.

While the dependent variable is per capita CO₂ emission, per capita income, energy consumption, renewable energy consumption, and environmental tax are included in the model as the main explanatory variables. In line with the findings of cross-sectional dependence and heterogeneity, second-generation panel methods were preferred; after unit root and cointegration analyses, long-term coefficients were estimated using the Common Correlated Effects (CCE) approach. The findings show that there is a long-term cointegration relationship between the variables.

According to the long-term coefficient estimates, the effect of income and energy consumption on CO₂ emissions is positive and statistically significant. While the impact of renewable energy consumption was found to be insignificant across the panel, the environmental tax was found to have a negative and significant effect on CO₂ emissions. Accordingly, a 1% increase in the environmental tax was found to reduce CO₂ emissions by approximately 0.23%.

The results suggest that Pigouvian-type environmental/carbon taxes, when used in conjunction with complementary energy efficiency and renewable energy policies, can be an effective tool in emission reduction.