Does Environmental Tax Revenue Track the Energy Transition? Panel Evidence from the EU-27, 2004–2023
Does Environmental Tax Revenue Track the Energy Transition? Panel Evidence from the EU-27, 2004–2023

Summary/Abstract: Environmental tax revenue as a share of gross domestic product is used in European Union policy documents as a proxy for environmental fiscal effort, and effort is expected to show up in the energy transition. This paper tests the second link directly. Using a balanced panel of the 27 member states over 2004–2023, with 540 country-year observations, two-way fixed effects and standard errors clustered by country, it estimates the association between environmental tax revenue, disaggregated into energy, transport and pollution components, and three transition outcomes: the renewable share of energy, energy intensity and carbon dioxide emissions per capita. The results do not support the expected relationship. No component of environmental tax revenue is significantly associated with the renewable share, and the point estimates are negative. Energy tax revenue is positively and significantly associated with energy intensity (0.034, p = 0.015) and with emissions per capita (0.052, p = 0.011), the opposite of the sign an incentive story predicts. The paper argues that this is not evidence that environmental taxation fails, but evidence that a revenue ratio measures the size of the taxed base rather than the strength of the price signal: energy tax revenue relative to output is, by construction, the implicit tax rate on energy multiplied by energy intensity, so a positive association with intensity is partly mechanical. The indicator used to monitor environmental fiscal effort in the Union cannot detect the effect it is meant to monitor, and the implicit tax rate should be reported alongside it.

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