Environmental Tax Races in a Decentralised System: Evidence of Regional Interaction in Climate Policy

Environmental taxation constitutes a key instrument of climate policy and plays an increasingly important role in decentralised governance systems. Using Spain as an empirical setting characterised by high fiscal decentralisation and pronounced territorial heterogeneity, we analyse the determinants of regional environmental taxation, accounting for both internal regional conditions and cross-regional policy interaction. Employing spatial panel econometric techniques, we provide robust evidence of spatial interaction and temporal persistence in regional environmental taxation at both the intensive and extensive margins. We also find that regional environmental taxation depends not only on domestic economic, institutional, and political characteristics, but also on those of neighbouring regions. These patterns are consistent with key theoretical mechanisms in fiscal federalism and public economics, including tax competition, yardstick competition, the double dividend hypothesis, NIMBY-type responses, and development–environment dynamics. Fur-ther analysis at the intensive margin reveals adjustment patterns consistent primarily with upward dynamics, although some evidence of downward responses is also found. In particular, upward adjustments appear to be more systematic, while downward responses are limited to regions with relatively lower environmental taxation. This asymmetry sug-gests that competitive pressures do not operate uniformly across jurisdictions. From a sustainability and governance perspective, the findings show that environmental tax policies in decentralised systems are shaped by strategic inter-regional interdependence, influencing the trajectories of regional sustainability transitions rather than reflecting isolated policy choices.