How Digital Governance Enhances Environmental Tax Revenue Capacity: The Role of Institutional Quality and Economic Complexity in OECD Countries

Environmental tax systems serve as a particularly effective mechanism for sustainable fiscal performances as well as the efficient and environmentally responsible behaviors. In OECD countries, the effectiveness of environmental tax revenue depends not only on economic structure but also on institutional quality and ICT development. However, empirical evidences on how institutional quality, economic complexity, and ICT development jointly influence environmental tax revenue remains limited. This paper aims to analyze the moderating role of ICT in influencing relationships between institutional quality, economic complexity, and environmental tax revenue capacity. Using 28 OECD member countries’ data spanning from 2002 to 2022, this paper employs the fixed-effects model with clustered standard errors model and cross-sectional augmented autoregressive distributed lag test these relationships. Control variables related to macroeconomic conditions and structural characteristics are included to ensure robustness of estimation, including gross domestic product, foreign direct investment, inflation rate and trade openness. The results indicate that institutional quality and economic complexity both have positive effects on environmental tax revenue. ICT development is found to strengthen the positive relationship between economic complexity and environmental tax revenue. However, ICT development weakens the positive effect of institutional quality on environmental tax revenue. This negative moderating suggests that ICT development may reduce the taxable base by improving environmental efficiency and compliance. Although ICT expansion improves the environmental-tax capacity of complex economies, it can substitute the institutional channel through the promotion of emission reduction and cleaner production. These findings imply that OECD government officials need to more closely coordinate digital governance mechanisms with environmental tax plans in order to reconcile their fiscal objectives and environmental performance.