IDEAS home Printed from https://ideas.repec.org/p/fem/femwpa/2023.26.html

Is public debt environmentally friendly? The role of EU fiscal rules on environmental quality: An empirical assessment

Author

Listed:
  • Giovanni Carnazza

    (Department of Economics and Management, University of Pisa)

  • Thomas I. Renström

    (Department of Economics and Management, Centre for Environmental and Energy Economics, Durham University)

  • Luca Spataro

    (Department of Economics and Management, University of Pisa)

Abstract

The EU has embarked on multiple initiatives reflecting its commitment to environmental enhancement and sustainable transitions. Notable among these are the European Green Deal and the NextGenerationEU recovery plan, both pivotal in fostering eco-friendly policies and sustainable practices within the region. Conversely, the fiscal rules within the EU, designed to manage budgetary deficits and debt-to-GDP ratios, may pose challenges to the implementation of fiscal measures targeted at achieving environmental quality objectives. These regulatory constraints potentially curtail the fiscal space available for policies aligned with the environmental goals set forth by the EU. To address this issue, using a panel of 27 European member countries observed annually from 1995 to 2021, we investigate the impact of two different indicators on the overall carbon intensity: on the one hand, the implicit tax rate on energy reduces environmental pollution; on the other hand, an increase in the stringency of the European fiscal framework and/or the debt-to-GDP ratio increase carbon intensity. From a policy point of view, our outcomes stress the importance of shaping national and European regulations to foster more sustainable environmental development.

Suggested Citation

  • Giovanni Carnazza & Thomas I. Renström & Luca Spataro, 2023. "Is public debt environmentally friendly? The role of EU fiscal rules on environmental quality: An empirical assessment," Working Papers 2023.26, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2023.26
    as

    Download full text from publisher

    File URL: https://feem-media.s3.eu-central-1.amazonaws.com/wp-content/uploads/NDL2023-026.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Huart Florence, 2013. "Is Fiscal Policy Procyclical in the Euro Area?," German Economic Review, De Gruyter, vol. 14(1), pages 73-88, February.
    2. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
    3. Doğan, Buhari & Chu, Lan Khanh & Ghosh, Sudeshna & Diep Truong, Huong Hoang & Balsalobre-Lorente, Daniel, 2022. "How environmental taxes and carbon emissions are related in the G7 economies?," Renewable Energy, Elsevier, vol. 187(C), pages 645-656.
    4. Reuter, Wolf Heinrich, 2019. "When and why do countries break their national fiscal rules?," European Journal of Political Economy, Elsevier, vol. 57(C), pages 125-141.
    5. Bram Gootjes & Jakob Haan & Richard Jong-A-Pin, 2021. "Do fiscal rules constrain political budget cycles?," Public Choice, Springer, vol. 188(1), pages 1-30, July.
    6. Bovenberg, A. Lans & Goulder, Lawrence H., 2002. "Environmental taxation and regulation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 23, pages 1471-1545, Elsevier.
    7. Renström, Thomas I. & Spataro, Luca & Marsiliani, Laura, 2021. "Can subsidies rather than pollution taxes break the trade-off between economic output and environmental protection?," Energy Economics, Elsevier, vol. 95(C).
    8. Cristiana Belu Manescu & Elva Bova & Martijn Hoogeland & Philipp Mohl, 2023. "Do National Fiscal Rules Support Numerical Compliance with EU Fiscal Rules?," European Economy - Discussion Papers 181, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    9. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    10. M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
    11. Bruce Morley, 2012. "Empirical evidence on the effectiveness of environmental taxes," Applied Economics Letters, Taylor & Francis Journals, vol. 19(18), pages 1817-1820, December.
    12. Jeffrey, Cynthia & Perkins, Jon D., 2015. "Reply to Discussion of “The Association between Energy Taxation, Participation in an Emissions Trading System, and the Intensity of Carbon Dioxide Emissions in the European Union”," The International Journal of Accounting, Elsevier, vol. 50(4), pages 427-434.
    13. Jeffrey, Cynthia & Perkins, Jon D., 2015. "The association between energy taxation, participation in an emissions trading system, and the intensity of carbon dioxide emissions in the European Union," The International Journal of Accounting, Elsevier, vol. 50(4), pages 397-417.
    14. Maria Carratù & Bruno Chiarini & Antonella D’Agostino & Elisabetta Marzano & Andrea Regoli, 2019. "Air pollution and public finance: evidence for European countries," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 46(7), pages 1398-1417, November.
    15. Marsiliani, Laura & Renstrom, Thomas I, 2000. "Time Inconsistency in Environmental Policy: Tax Earmarking as a Commitment Solution," Economic Journal, Royal Economic Society, vol. 110(462), pages 123-138, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Carnazza, Giovanni & Renström, Thomas I. & Spataro, Luca, "undated". "Is public debt environmentally friendly? The role of EU fiscal rules on environmental quality: An empirical assessment," FEEM Working Papers 339126, Fondazione Eni Enrico Mattei (FEEM).
    2. Saffet Akdag & Hakan Yildirim & Andrew Adewale Alola, 2025. "Comparative benefits of environmental protection expenditures and environmental taxes in driving environmental quality of the European countries," Natural Resources Forum, Blackwell Publishing, vol. 49(3), pages 2188-2203, August.
    3. Hongbo Liu & Shuanglu Liang, 2019. "The Nexus between Energy Consumption, Biodiversity, and Economic Growth in Lancang-Mekong Cooperation (LMC): Evidence from Cointegration and Granger Causality Tests," IJERPH, MDPI, vol. 16(18), pages 1-15, September.
    4. Andre Gbato, 2017. "Impact of Taxation on Growth in Sub-Saharan Africa: New Evidence Based on a New Data Set," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(11), pages 173-193, November.
    5. Caravaggio, Nicola, 2022. "Economic growth and forest transition in Latin America," Forest Policy and Economics, Elsevier, vol. 135(C).
    6. Caravaggio, Nicola, 2020. "A global empirical re-assessment of the Environmental Kuznets curve for deforestation," Forest Policy and Economics, Elsevier, vol. 119(C).
    7. Carnazza, Giovanni, 2023. "Ex-post and real-time estimations of the output gap: A new assessment of fiscal procyclicality in the eurozone," The Journal of Economic Asymmetries, Elsevier, vol. 28(C).
    8. Lyócsa, Štefan & Výrost, Tomáš & Baumöhl, Eduard, 2011. "Unit-root and stationarity testing with empirical application on industrial production of CEE-4 countries," MPRA Paper 29648, University Library of Munich, Germany.
    9. Cristiana Tudor & Robert Sova, 2021. "On the Impact of GDP per Capita, Carbon Intensity and Innovation for Renewable Energy Consumption: Worldwide Evidence," Energies, MDPI, vol. 14(19), pages 1-25, October.
    10. James Temitope Dada & Folorunsho Monsur Ajide & Mamdouh Abdulaziz Saleh Al‐Faryan & Mosab I. Tabash, 2025. "Trade policy and environmental sustainability in Africa: An empirical analysis," Natural Resources Forum, Blackwell Publishing, vol. 49(3), pages 2274-2298, August.
    11. Giorgio Canarella & Mahmoud Nourayi & Michael J. Sullivan, 2014. "An alternative test of the trade-off theory of capital structure," Contemporary Economics, Vizja University, vol. 8(4), December.
    12. Andre Gbato, 2017. "Impact of Taxation on Growth in Sub-Saharan Africa: New Evidence Based on a New Data Set," Post-Print hal-01673738, HAL.
    13. Romero-Ávila, Diego, 2009. "Are OECD consumption-income ratios stationary after all?," Economic Modelling, Elsevier, vol. 26(1), pages 107-117, January.
    14. Mounir Dahmani, 2024. "Environmental quality and sustainability: exploring the role of environmental taxes, environment-related technologies, and R&D expenditure," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 26(2), pages 449-477, April.
    15. Carnazza, Giovanni & Liberati, Paolo & Sacchi, Agnese, 2025. "Does politics matter? A comparative assessment of discretionary fiscal policies in the euro area," European Journal of Political Economy, Elsevier, vol. 90(PA).
    16. Kelly, Arsene Mouongue & Ndeffo, Luc Nembot, 2025. "Aid or sanction? Comparing the effectiveness of climate finance and environmental taxation in mitigating environmental degradation in Africa," Innovation and Green Development, Elsevier, vol. 4(3).
    17. Asta Ndongo & Ibrahima Thione Diop, 2021. "Economic and Monetary Integration in ECOWAS Countries: A Panel VAR Approach to Identify Macroeconomic Shocks," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 7(2), pages 61-87, December.
    18. Taner Akan & Halil İbrahim Gündüz & Tara Vanlı & Ahmet Baran Zeren & Ali Haydar Işık & Tamerlan Mashadihasanli, 2023. "Why are some countries cleaner than others? New evidence from macroeconomic governance," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 25(7), pages 6167-6223, July.
    19. Dogan, Eyup & Hodžić, Sabina & Šikić, Tanja Fatur, 2023. "Do energy and environmental taxes stimulate or inhibit renewable energy deployment in the European Union?," Renewable Energy, Elsevier, vol. 202(C), pages 1138-1145.
    20. Kashif Abbass & Cosmina L. Voinea & Nadine Roijakkers & Muhammad Usman & Huaming Song, 2025. "Innovation Strategies for Ecological Sustainability: Effects of Natural Resources and Energy Consumption," Sustainable Development, John Wiley & Sons, Ltd., vol. 33(3), pages 4631-4651, June.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fem:femwpa:2023.26. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Alberto Prina Cerai The email address of this maintainer does not seem to be valid anymore. Please ask Alberto Prina Cerai to update the entry or send us the correct address (email available below). General contact details of provider: https://edirc.repec.org/data/feemmit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.