DP8551 | Why Europe has become environmentally cleaner: Decomposing the roles of fiscal, trade and environmental policies

Publication Date

01/08/2011

JEL Code(s)

Keyword(s)

Programme Area(s)

Network(s)

Abstract

This paper systematically examines the role of fiscal policy, trade and energy taxes on environmental quality in Europe using disaggregated data for 12 European countries over the 1995-2008 period. It uses a methodology that obtains estimates mostly free of time-varying omitted variable biases. Controlling for the scale effect, our estimations show that fiscal policies and energy taxes are effective in reducing the concentration of certain pollutants through different mechanisms. We also find that trade has a direct effect on production pollutants, which is most likely due to an output composition effect, but not on consumption pollutants. Increasing the share of fiscal spending and shifting the emphasis of fiscal spending towards public goods and against non-social subsidies has a surprising and unintended beneficial effect on the concentrations of ozone, perhaps the most difficult to control pollutant. Finally, energy taxes appear to have an important effect in reducing nitrogen dioxide pollution but it has no effect on ozone and sulfur dioxide.