Green budgeting, environmental fiscal instruments, and sustainability: evidence from European union countries

This study examines the effects of green budgeting and environmental fiscal instruments on environmental sustainability in 22 European Union (EU-22) countries over the period 2000–2023. The environmental sustainability index, used as the dependent variable, was constructed from the scores for SDG 13 (Climate Action), SDG 14 (Life Below Water), and SDG 15 (Life on Land) using Principal Component Analysis (PCA), with the first and second principal components (PC1 and PC2) jointly explaining 82.89% of the total variance. The empirical analysis comprises three models: the full EU-22 sample, non-green budgeting countries, and countries that adopted green budgeting during the sample period. The Method of Moments Quantile Regression (MMQR) approach is employed to capture heterogeneous effects across different levels of environmental performance, complemented by Common Correlated Effects (CCE) and Augmented Mean Group (AMG) estimators as robustness checks. The findings reveal substantial heterogeneity across quantiles and country groups. Environmental taxes are positively associated with environmental sustainability across all quantiles in green-budgeting countries, whereas significant associations are limited to the lower and middle quantiles in non-green budgeting countries. Renewable energy use is positively and significantly associated with environmental sustainability across all quantiles only in green-budgeting countries, while environmental protection expenditures show significant positive associations primarily at lower and middle performance levels. Greenhouse gas emissions are consistently negatively associated with environmental sustainability across all models and quantiles. Green budgeting adoption itself is negatively associated with environmental sustainability at the lower and middle quantiles, indicating that environmental improvements do not automatically follow adoption. Accordingly, non-green budgeting countries should systematically integrate environmental objectives into budgetary processes, while adopting countries should strengthen implementation quality, monitoring, and environmental impact assessment. At the EU level, greater coordination of green-budgeting practices and sustained reductions in greenhouse gas emissions are recommended.