Unpacking the green box: Endogenous preferences and environmental policy stringency in European Countries

This paper identifies the determinants of the OECD Environmental Policy Stringency (EPS) index using a panel of 21 European countries for the period 2009-2019. If there is a large literature on the macroeconomic, political, and social determinants of EPS, the analysis of people's preferences towards environmental policies is still burgeoning. Thus, the main goal of this paper is to estimate the effects of environmental preferences on the EPS indicator. Due to the endogeneity of preferences, we have applied an instrumental variable framework to estimate our empirical model. Our most important result is to show that environmental preferences have a positive and significant effect on the level of the EPS indicator once the endogeneity bias has been taken into account: on average, a rise in the prevalence of environmental preferences of 1% in a country will increase the aggregate EPS indicator by at least 0.25%. Furthermore, it should be noted that the channels through which environmental preferences influence the EPS operate primarily through market and technological instruments. In these two cases, the estimated elasticities are almost four times higher than for the aggregate index. Our results have important policy implications.