Assessing the Role of Governance and Environmental Taxes in Driving Energy Transitions: Evidence from High-income Countries

Mitigating the effects of climate change is a challenge that requires new institutional arrangements and environmental policies. We examine how taxes and governance interact to influence the energy transition and use a relevant indicator: the Energy Transition Index (ETI) as a proxy for energy transition. Using panel data from 26 high-income countries over the period 2012-2019, we identify significant long-term causality. We show that a combination of fair governance and environmental taxes could improve the current pace of energy transition by about 73%. Our cluster analysis reveals that the most effective strategy to drive the energy transition is to adopt a moderate environmental tax, between 1.84% and 2.65% of GDP, in the context of a high institutional governance index. In the short run, the effects of governance and environmental taxes are not statistically significant. In the long run, they can have a very positive and significant impact on the energy transition. The case studies of Sweden, Denmark and France, with higher levels of ETI, are discussed in the light of their governance. We contribute to enriching the debate on energy transitions with new empirical evidence and provide policy recommendations tailored to each historical and social context.