Evaluating the Economic and Environmental Effects of Environmental Taxation in OECD Countries

As concerns about global environmental issues are recognized as a significant factor that must be addressed and mitigated, policymakers are turning to taxation to internalize externalities and motivate sustainable practices. This paper investigates the effectiveness of environmental taxation in achieving economic and environmental objectives by analyzing data from OECD countries. Examining the relationship between taxation, economic behavior, and environmental goals provides essential insights into the implementation and outcomes of environmental taxation policies. If appropriately designed, environmental taxation can be an important tool that aligns economic incentives and environmental objectives. In order to test for the effect that environmental taxes would have on the economy and the environment, data were analyzed for the OECD countries for the period 1994-2023 by using several techniques, including the Ordinary Least Squares, Fixed Effects, and Random Effects models. The findings suggest that in OECD countries, by implementing environmental taxation, the desired economic and environmental goals are not being met yet, since environmental taxation is not contributing to positive economic growth and not contributing to lowering emissions, such as a one percentage point increase in environmental related tax revenue, leads to a decrease in the real GDP of $4633per capita, and 1.22 metric ton increase in emissions per capita, indicating that the environmental tax as a tool is not being used effectively in OECD countries.