Rule of law and its implications for the environmental taxation-income path across European Countries

Castiglione, Concetta and Infante, Davide and Smirnova, Janna (2012): Rule of law and its implications for the environmental taxation-income path across European Countries.

Abstract

Recent research has clearly demonstrated that economic development is closely related to environmental quality. In last two decades this relationship has been described by the Environmental Kuznets Curves that postulates an inverted U-shaped relationship between pollution and income. However, while theoretical and empirical research has focused on the polluting effects of economic development, few have identified the policy instruments which can be introduced to counteract such negative effects. This paper concentrates on one of these instruments and examines how environmental taxation is related to economic development. The introduction of environmental taxes usually requires strong regulation capabilities such as effective monitoring and enforcement. We assume that these capabilities reflect the integrity of the institution of rule of law and examine how the strength of rule of law affects the environmental taxation-income path. Data from 28 European countries analysed confirm the existence of an inverse U-shaped relationship between environmental taxation and per capita income. The empirical results clearly demonstrate that the environmental taxation-income relationship is strongly influenced by the rule of law which, when strong, ensures that environmental policies are implemented effectively. A strong rule of law thus contributes to achieving a turning point at lower levels of per capita income. Our analysis also made it possible to identify differences in environmental taxation-income paths among European countries, showing that post-transition economies may have not yet reached the turning point of the curve due to the presence of a weaker rule of law.

• Item Type: MPRA Paper
• Language: English
• Keywords: Environmental taxation; Environmental Kuznets Curve; Rule of law
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O43 - Institutions and Growth; P - Economic Systems > P2 - Socialist Systems and Transitional Economies > P28 - Natural Resources ; Energy ; Environment; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities ; Redistributive Effects ; Environmental Taxes and Subsidies; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q58 - Government Policy

References

Baumol, W., 1972. On taxation and the control of externalities. Am. Econ. Rev. 62, 3, 307–321.

Bhattarai, M., Hammig, M., 2001. Institutions and the Environmental Kuznets Curve for deforestation: a cross–country analysis for Latin America, Africa, and Asia. World Dev. 29, 6, 995–1010.

Bhattarai, M., Hammig, M., 2004. Governance, economics policy, and the environmental Kuznets curve for natural tropical forests. Environ. Devel. Econ. 9, 3, 367-382.

Bimonte, S., 2002. Information Access, Income Distribution, and the Environmental Kuznets Curve. Ecol. Econ. 41, 1, 145–156.

Bosquet, B., 2000. Environmental tax reform: does it work? A survey of the empirical evidence. Ecol. Econ. 34, 19–32.

Bovenberg, A.L., de Mooij, R.A. 1997. Environmental tax reform and endogenous growth. J. Public. Econ. 63, 207-237.

Bradford, D.F., Fender, R.A., Shore, S.H., Wagner, M., 2005. The Environmental Kuznets Curve: Exploring a Fresh Specification. Contrib. Econ. Analysis Policy. 4, 1, 1–28.

Butkiewicz, J.L., Yanikkaya, H., 2006. Institutional quality and economic growth: Maintenance of the rule of law or democratic institutions, or both? Econ. Model. 23, 4, 648–661.

Cameron, A.C., Trivedi, P.K., 2009. Microeconometrics Using Stata. College Station, Texas.

Castiglione, C., Infante, D., Smirnova, J. 2012. Rule of law and the Environmental Kuznets Curve: evidence for carbon emissions, Int. J. Sust. Econ., Vol. 4, n. 3, forthcoming.

Cole, M.A., 2007. Corruption, income and the environment: an empirical analysis. Ecol. Econ. 62, 4, 637–647.

Culas, R.J., 2007. Deforestation and the environmental Kuznets curve: an institutional perspective. Ecol. Econ. 61, 2, 429–437.

Damania, R., Fredriksson, P.G., List, J.A., 2003. Trade liberalization, corruption, and environmental policy formation: theory and evidence. J. Environ. Econ. Manag. 46, 3, 490–512.

Dasgupta, S., Mody, A., Roy, S., Wheeler, D., 2001. Environmental regulation and 10 development: a cross-country empirical analysis. Oxford Devel. Stud. 29, 2, 173–187.

Di Vita, G., 2009. Legal families and environmental protection: Is there a causal relationship? J. Policy. Model. 31, 5, 694–707.

Dinda, S., 2004. Environmental Kuznets Curve Hypothesis: A Survey. Ecol. Econ. 49, 4, 431–455.

Dollar, D., Kraay, A., 2000. Property Rights, Political Rights, and the Development of Poor Countries in the Post–Colonial Period. World Bank Working Papers. Washington, DC. http://www.worldbank.org/research/growth.

Dutt, K., 2009. Governance, institutions and the environmental–income relationship: a cross–country study. Environ. Devel. Econ. 11, 4, 705–723.

EEA (European Environment Agency), 1995. Environment in the European Union. Report for the Review of the Fifth Environmental Action Programme.

EEA (European Environment Agency), 2005. Market-based instruments for Environmental Policy in Europe, EEA Technical Report No. 8/2005, Copenhagen, Denmark.

Ekins, P., 1999. European environmental taxes and charges: recent experience, issues and trends. Ecol. Econ. 31, 1, 39–62.

Ekins, P., Barker, T., 2001. Carbon taxes and carbon emissions trading. Journal of Economic Surveys 15, 3, 325–352.

Ekins, P., 2011. Introduction to the issues and the Book. In: Ekins, P., Speck, S. (Eds.), Enviromental Tax Reform (ETR). A policy for Green Growth, Oxford University Press, Oxford.

Frey, B.S. 1999. Morality and Rationality in Environmental Policy. Journal of Consumer Policy 22: 395–417, 1999.

Galeotti, M., 2007. Economics Growth and the Quality of the Environmental: Taking Stock. Environ. Dev. Sustain. 9, 4, 427–454.

Galeotti, M., Lanza, A., Pauli, F., 2006. Reassessing the environmental Kuznets curve for CO2 emissions: A robustness exercise. Ecol. Econ. 57, 1, 152–163.

Frankel, J.A., Rose, A.K., 2002. Is Trade Good Or Bad For The Environment? Sorting Out The Causality. Working Paper 9201, NBER.

Hall, R.E., Jones, C.I., 1999. Why do some countries produce so much more output per worker than others? Q. J. Econ. 114, 1, 83–116.

Kaufmann, D., Kraay, A., Mastruzzi, M., 2010. The Worldwide Governance Indicators: A Summary of Methodology, Data and Analytical Issues. World Bank Policy Research.

Khanna, N., Plassmann, F., 2004. The demand for environmental quality and the environmental Kuznets Curve hypothesis. Ecol. Econ. 51, 3-4, 225–236.

Knack, S., Keefer, P. 1995. Institutions and economic performance: cross–country tests using alternative institutional measures. Econ. Politics. 7, 3, 207–227.

Leitão, A., 2010. Corruption and the environmental Kuznets Curve: Empirical evidence for sulfur. Ecol. Econ. 69, 11, 2191–2201.

Lipford, J.W., Yandle, B. 2010. Environmental Kutnets curves, carbon emissions, and public choice. Environ. Devel. Econ. 15, 4, 417–438.

Lopez, R., Mitra, S. 2000. Corruption, pollution, and the Kuznets environment curve, Journal of Environmental Economics and Management, 40, 137-150.

Magnani, E., 2000. The Environmental Kuznets Curve, environmental protection policy and income distribution. Ecol. Econ. 32, 3, 431–443

Markandya, A., Golub, A., Pedroso-Galinato, S., 2006. Empirical analysis of national income and SO2 emissions in selected European countries. Environ. Resour. Econ. 35, 3, 221–257.

Panayotou, T., 1997. Demystifying the Environmental Kuznets Curve: turning a black box into a policy tool. Environ. Devel. Econ. 2, 4, 465–484.

Pigou, A.C., 1932. The Economics of Welfare. 4th ed. Macmillan, London.

Scrimgeour, F., Oxley, L., Fatai, K., 2005. Reducing carbon emissions? The relative effectiveness of different types of environmental tax: the case of New Zealand. Environmental Modelling & Software 20, 1439–1448.

Stern, D. I., 2004. The Rise and Fall of the Environmental Kuznets Curve. World Dev. 32, 8, 1419–1439.

Torras, M., Boyce, J.K., 1998. Income, inequality and pollution: reassessment of the Environmental Kuznets Curve. Ecol. Econ. 25, 2, 147–160.

Vincent, J.R., 1997. Testing for environmental Kuznets curves within a developing country. Environ. Devel. Econ. 2, 4, 417–431.

Weisbuch, G., 2000. Environment and institutions: a complex dynamical systems approach. Ecol. Econ. 35, 3, 381–391.

Welsch, H., 2004. Corruption, growth and the environment: a cross-country analysis. Environmental and Development Economics, 9, 663-693