The impact of environmental tax and emission trading system on environmental quality in OECD countries

Achieving sustainability requires a coherent policy mix to address the climate change problem. To internalize the cost of carbon emissions resulting from the existing mode of production, central market-based mechanisms, such as carbon taxes and emissions trading systems (ETS), can be applied. Nevertheless, structural and technological context may affect their effectiveness. In this context, the present study tries to assess the impact of carbon pricing instruments on CO2 emissions while explicitly accounting for the structural and technological framework by integrating energy intensity and the usage of low-carbon energy in the energy mix, using a dynamic panel approach based on the Generalized Method of Moments for 31 OECD countries over the period 1997-2020. The results show that the implementation of carbon taxes or ETS does not have a statistically significant impact on emission reductions. However, combining the two instruments alongside a higher penetration of low-carbon energy sources leads to a significant decline in emissions. These findings suggest that the effectiveness of economic instruments should be combined with complementary structural and technological transformations. An integrated policy mix that simultaneously promotes energy efficiency and accelerates the transition toward low-carbon energy systems may be embedded with carbon pricing.