Forecasting and Explaining Environmental Fiscal Capacity: How Informality and FinTech Shape Environmental and Biodiversity Finance

ABSTRACT This study examines the impact of the shadow economy (SE) on environmental fiscal capacity (environmental tax revenue, public environmental expenditure, and biodiversity expenditure) and the moderating role of financial technology (FinTech) across OECD countries over 2004–2022. Using second‐generation econometric techniques, with robustness assessed through the CCEMG estimator, Driscoll–Kraay fixed effects, and one‐step GMM, and complemented by machine‐learning forecasting (tensor double machine learning and a graph‐inspired machine learning model) compared using the Diebold–Mariano test. The analysis yields three main findings. First, the SE significantly reduces environmental tax revenue and public environmental and biodiversity expenditures, consistent with the hypothesis that informality constrains the fiscal capacity required for environmental protection. Second, FinTech adoption directly enhances environmental revenue and mitigates the adverse effect of the SE on environmental revenue through a transaction‐formalization channel that expands the observable tax base, although its direct association with biodiversity expenditure is negative, reflecting a countervailing frontier‐expansion effect. Third, the forecasting evidence reinforces this structural account: Environmental tax revenue is strongly forecastable and public environmental expenditure moderately so, whereas biodiversity expenditure resists accurate prediction across both models. Overall, the findings highlight the importance of digital financial innovation as a complementary instrument for reducing informality, strengthening environmental governance, and advancing biodiversity conservation in OECD economies.