Modelling Urban Expansion, Energy Consumption, and Environmental Sustainability: The Moderating Role of Environmental Taxes in Developing Countries

Rapid expansion in urbanisation, along with the rising demand for energy consumption, has deepened environmental apprehensions among developing economies and intensified their concerns about long-run environmental sustainability. This article examines how urban expansion and rising energy consumption impact environmental sustainability, and whether environmental taxes moderate this relationship, by using a panel of 110 developing countries over the period of 2010 to 2024. To capture both static and dynamic relationships among the variables, we have applied complementary econometric methodologies that allow for cross-country heterogeneity and persistence in emissions. The estimated outcomes show that urban expansion and energy consumption are significantly increasing gas emissions, and this outcome is consistent with the idea that environmental costs of urban-led growth and energy-intensive development. But as we have added environmental taxes as a moderating policy instrument, the positive impact of energy consumption and urbanisation on emissions becomes negative in most specifications. The significant impact of both interaction terms, i.e., environmental taxes and urbanisation, and environmental taxes and energy consumption, across different estimation strategies, suggests that environmental taxation weakens emissions and encourages structural change with rising energy use. Renewable energy consumption and foreign direct investment have significant influences on emissions, emphasising the role of energy structure and investment composition in shaping environmental outcomes, whereas the income effect varies across models. The outcomes of dynamic models also confirm emissions persistence, but over time, environmental taxes reduce the degree of emissions persistence. The estimated outcomes imply that environmental taxes can support a decoupling of urbanisation and energy-driven growth from environmental degradation. Thus, developing countries should balance urban development, energy demand, and environmental sustainability through credible market-based regulations.