European Green Deal: Environmental Taxation and Its Sustainability in Conditions of High Levels of Corruption

Despite environmental taxation’s presumed advantages for long-term sustainable development goals, the problematic institutional conditions associated with high levels of corruption could become a significant obstacle undermining these efforts. Taking the example of the Czech Republic as a benchmark, the aim of this article is to evaluate the impact of corruption and its implications on the size of the official and the shadow economy in the sector burdened with environmental excise tax while confronting it with the sector not burdened with such tax. In terms of methodology, an extended DSGE (Dynamic stochastic general equilibrium) model has been used. In the case of the shadow economy, the two sectors, burdened and not burdened with environmental taxes, followed a similar trend. However, concerning the official economy, this research found out that if environmental taxation is not applied, then lower, non-systemic corruption has a positive effect on the size of production as the effect of increased workforce motivation clearly dominates, suppressing the effect of reduced capital accumulation. Conversely, in the sector burdened with environmental taxation, corruption has an almost unequivocally negative effect on the production economy. In this sense, corruption has the capacity to limit the implementation of sustainable development policies including the European Green Deal, especially if it is systemic in nature.