Do Environmental Taxes Prioritise Environmental Effectiveness or Revenue-Raising Motivation? Evidence from OECD Countries

This paper examines whether the relationships between environmentally related taxes, environmental outcomes, and environmental protection expenditures are more consistent with the environmental objectives emphasised by Pigouvian approaches or with a predominantly revenue-raising role of environmental taxation in 27 OECD economies over the period 1995–2023. To address this question, two complementary models are estimated: the first examines the effects of environmental taxes and environmental protection expenditures on the ecological footprint, while the second examines the long-run relationship between environmental tax revenues and environmental protection expenditures. Pedroni and Westerlund tests provide evidence of long-run relationships in both models. BA-OLS and CUP-FM estimates show that environmental taxes reduce the ecological footprint, although their average effect is statistically insignificant, whereas environmental protection expenditures significantly reduce it. Environmental taxes also have a positive and significant effect on environmental protection expenditures. The MMQR results reveal substantial heterogeneity underlying these average relationships. The negative effect of environmental taxes on the ecological footprint becomes progressively stronger as the ecological footprint increases and is significant from the median to the upper quantiles, whereas the effect of environmental protection expenditures remains statistically insignificant across all quantiles. In the second model, the positive effect of environmental taxes on environmental protection expenditures is significant only in the middle quantiles, indicating that the positive relationship between environmental tax revenues and environmental protection expenditures is not uniform across the distribution. Taken together, the findings provide conditional support for the Strict Pigouvian Approach and partial support for the Broad Pigouvian Approach: environmental taxes are more effective in reducing ecological footprints at higher levels of environmental pressure, while their positive association with environmental protection expenditures is not uniform across the distribution.