CAN THE ENVIRONMENTAL KUZNETS CURVE EXPLAIN THE DIVIDE IN EUROPE IN TERMS OF CLIMATE CHANGE CONSCIOUSNESS?

Abstract

There is a divide in terms of environmental policies between the countries in the North and West of Europe versus those in the South and East. At the same time, these two regions are divided in terms of their economic development. While the Northern and Western European countries are, on average, more advanced and have higher levels of income per capita, the Southern and Eastern European countries are often observed to be relatively less developed with lower average income. I use the hypothesis of the Environmental Kuznets Curve (EKC) to explain this divide, however, instead of testing the degree or level of pollution, I investigate the impact of environmental consciousness on the level of emission tax rates set by the government. Data for environmental consciousness is obtained from the Eurobarometer Polls conducted by the European Commission, whereas the ‘Implicit Tax Rate’, which is a composite index of different forms of tax relating to environmental quality, is obtained from the Eurostat database. I use data from 31 countries across Europe for the time-period between 2007 and 2018. A reduced-form regression of the EKC hypothesis confirms a positive relationship between income per capita and emission tax rates. I find that if GDP per capita increases by 1%, then the emission tax rates increases by 2.9%. This implies that the emission tax rate is significantly responsive to an increase in the average income of a country. The second-order term of the GDP per capita is negative, which complies with the established concavity of the EKC literature. Further, I also find that the effect of the Rule of Law is positive and significant, thus, serving as the determinant of how effectively consumer’s environmental consciousness effects government’s policy decisions. The effect of Rule of Law on emission taxes is higher in the North and Western countries and smaller in the South and Eastern countries.