Environmental Policy Stringency and Carbon Dioxide Emission: Asymmetric Causality Analysis

The effectiveness of policy tools used to combat global environmental degradation and climate change is gaining importance. The role of environmental policies in reducing carbon dioxide emissions and whether rising emissions levels lead to tightening of environmental policies are the main research questions of this study. Using panel causality methods, this study examines the relationship between the Environmental Policy Stringency Index (EPS) and carbon dioxide (CO2) emissions across 23 OECD countries from 1991 to 2020. The results of the Dumitrescu–Hurlin panel causality test show bidirectional causality between EPS and CO2. According to the asymmetric causality test, we find causality from EPS to CO2 during positive shocks. Furthermore, when examining negative shocks, we report a unidirectional causality originating only from EPS in the US. Our results demonstrate that the bidirectional relationship between EPS and CO2 can contribute to the development of effective and balanced environmental policies if policymakers and society consider this interaction.