Vol. 13 No. 3 (2025)
September 2025

Articles

Long-run effects of fiscal policies on environmental pollution

Published 2025-09-30

  • Derya Tabiloğlu
    • ,
  • Temel Gürdal

Derya Tabiloğlu
Sinop University

Temel Gürdal
Sakarya University

Abstract

Objective: This study aims to investigate the long-run effects of fiscal policy instruments, including environmental taxes, environmental protection expenditures and renewable energy incentives on environmental pollution, measured as ecological footprint, in a sample of European Union countries and Turkey using annual data for the period 1996-2018.

Research Design & Methods: The conventional literature generally suggests that fiscal policy instruments can affect environmental pollution in the long run. To examine whether fiscal policy instruments will be effective on pollution in the long run, we employed both fully modified ordinary least squares (FMOLS) and dynamic ordinary least squares (DOLS) methods.

Findings: The estimation results showed that renewable energy incentives are the most effective policy instrument to mitigate pollution. We also found that environmental taxes have negative and statistically significant effects on pollution. However, the relationship between environmental protection expenditures and pollution is not robust and changes with respect to the estimation method.

Implications & Recommendations: The findings of this study indicate that fiscal policy instruments can reduce environmental pollution. In this vein, renewable energy incentives and environmental tax tools appear to be the most effective fiscal policy instruments. Therefore, policymakers can use fiscal policy instruments to deal with environmental pollution problems.

Contribution & Value Added: Given the limited research on the combined effects of fiscal policy instruments, we aimed to contribute to the literature by employing FMOLS and DOLS estimation procedures. These methods allowed us to examine the long-run relationship between fiscal policy instruments and the ecological footprint. To examine the long-run relationship between fiscal policy instruments and ecological footprint, we prefer to employ FMOLS and DOLS methods which consider potential autocorrelation and some degree of heterogeneity. Therefore, we aimed to contribute to the literature by investigating the effectiveness of fiscal policy instruments on environmental pollution in our sample of countries.

Keywords

environmental pollution, fiscal policies, environmental protection expenditures, environmental taxes, renewable energy resources

(PDF) Save

Author Biography

Derya Tabiloğlu

PhD in Finance (2022, Sakarya University, Turkey), Assistant Professor at the Sinop University (Turkey). Her research interests include finance and fiscal law.

Temel Gürdal

PhD in Finance (2001, Dokuz Eylül University, Turkey), Professor at the Sakarya University (Turkey), Her research interests include finance and fiscal law. In 2014, Gürdal was a visiting researcher at Durham University in England. He has published numerous books and articles in the areas of the Turkish tax system, tax law, public finance, and fiscal policy.

References

  1. Akdag, S., Yildirim, H., & Alola, A.A. (2024). Comparative benefits of environmental protection expenditures and environmental taxes in driving environmental quality of the European countries. Natural Resources Forum, 1-16. https://doi.org/10.1111/1477-8947.12464
  2. Ali, M., & Kirikkaleli, D. (2024). Environmental tax, renewable energy and environmental sustainability in Germany: evidence from wavelet and Fourier-based approaches. Management of Environmental Quality, 35(6), 1213-1232. https://doi.org/10.1108/MEQ-09-2023-0310
  3. Apergis, N., & Öztürk, İ. (2015). Testing Environmental Kuznets Curve Hypothesis in Asian Countries. Ecological Indicators, 52, 16-22. https://doi.org/10.1016/j.ecolind.2014.11.026
  4. Apergis, N., Payne, J.E., Menyah, K., & Wolde-Rufael, Y. (2010). On The Causal Dynamics Between Emissions, Nuclear Energy, Renewable Energy, And Economic Growth. Ecological Economics, 69(11), 2255-2260. https://doi.org/10.1016/j.ecolecon.2010.06.014
  5. Appiah, M., Li, M., Naeem, M.A., & Karim, S. (2023). Greening the globe: Uncovering the impact of environmental policy, renewable energy, and innovation on ecological footprint. Technological Forecasting and Social Change, 192, 122561. https://doi.org/10.1016/j.techfore.2023.122561
  6. Barra, C., & Zotti, R. (2018). Investigating The Non-Linearity Between National İncome And Environmental Pollution: International Evidence of Kuznets Curve. Environmental Economics and Policy Studies, 20(1), 179-210. https://doi.org/10.1007/s10018-017-0189-2
  7. Bento, J.P.C., & Moutinho, V. (2016). CO2 Emissions, Non-Renewable And Renewable Electricity Production, Economic Growth, And İnternational Trade in Italy. Renewable and Sustainable Energy Reviews, 55, 142-155. https://doi.org/10.1016/j.rser.2015.10.151
  8. Bloch, H., Rafiq, S., & Salim, R. (2012). Coal Consumption, CO2 Emission and Economic Growth in China: Empirical Evidence And Policy Responses. Energy Economics, 34(2), 518-528. https://doi.org/10.1016/j.eneco.2011.07.014
  9. Bostan, I., Onofrei, M., Doina Dascalu, E., Firtescu, B., & Toderaşcu, C. (2016). Impact of Sustainable Environmental Expenditures Policy on Air Pollution Reduction, During European Integration Framework. Amfiteatru Economic Journal, 18(42), 286-302. Retrieved from https://www.proquest.com/docview/1794832250/fulltextPDF/75B5DCE2BA324451PQ/1?accountid=25096&sourcetype=Scholarly%20Journals on October 20, 2023.
  10. Bozatli, O., & Akca, H. (2023). The effects of environmental taxes, renewable energy consumption and environmental technology on the ecological footprint: Evidence from advanced panel data analysis. Journal of Environmental Management, 345, 118857. https://doi.org/10.1016/j.jenvman.2023.118857
  11. Chen, Y., Wang, Z., & Zhong, Z. (2019). CO2 Emissions, Economic Growth, Renewable And Non-Renewable Energy Production And Foreign Trade in China. Renewable Energy, 131, 208-216. https://doi.org/10.1016/j.renene.2018.07.047
  12. Cole, M.A. (2004). Trade, the Pollution Haven Hypothesis And The Environmental Kuznets Curve: Examining the Linkages. Ecological Economics, 48(1), 71-81. https://doi.org/10.1016/j.ecolecon.2003.09.007
  13. Dinda, S. (2004). Environmental Kuznets Curve Hypothesis: A survey. Ecological Economics, 49(4), 431-455. https://doi.org/10.1016/j.ecolecon.2004.02.011
  14. European Commission. (2017). Capacity Building, Programmatic Development and Communication in the Field of Environmental Taxation and Budgetary Reform. Retrieved from https://ieep.eu/uploads/articles/attachments/de8980ef-e9cc-49f2-b66e-ac7a71be9e15/ETR and Civil Society Final Report 191217 FINAL.pdf?v=63680917736 on April 13, 2023.
  15. European Commission. (2021). Green Taxation and Other Economic İnstruments: Internalising Environmental Costs to Make the Polluter Pay. Retrieved from https://ieep.eu/uploads/articles/attachments/134d9257-53c5-4a20-885b-9f6615452486/Green taxation and other economic instruments – Internalising environmental costs to make the polluter pay_Study_10.11.2021.pdf?v=63807385248 on May 15, 2023.
  16. Eurostat. (2022). European Community Statistical Office. Retrieved from https://ec.europa.eu/eurostat/ on May 15, 2023.
  17. Grossman, G., & Krueger, A. (1991). Environmental Impacts of a North American Free Trade Agreement. In National Bureau of Economic Research Working Paper No: 3914. https://doi.org/10.3386/w3914
  18. Grossman, G.M., & Krueger, A.B. (1995). Economic Growth And The Environment. Quarterly Journal of Economics, 353-377. https://doi.org/10.2307/2977834
  19. Gupta, M.R., & Barman, T.R. (2009). Fiscal policies, Environmental Pollution and Economic Growth. Economic Modelling, 26(5), 1018-1028. https://doi.org/10.1016/j.econmod.2009.03.010
  20. He, J., & Wang, H. (2012). Economic Structure, Development Policy and Environmental Quality: An Empirical Analysis Of Environmental Kuznets Curves with Chinese Municipal Data. Ecological Economics, 76, 49-59. https://doi.org/10.1016/j.ecolecon.2012.01.014
  21. Hiton, H., & Levinson, A. (1998). Factoring the Environmental Kuznets Curve: Evidence from Automotive Lead Emissions. Journal of Environmental Economics and Mangement, 35, 126-141. https://doi.org/10.4324/9781351161084-3
  22. Huang, J.T. (2018). Sulfur Dioxide (SO2) Emissions and Government Spending on Environmental Protection in China – Evidence from Spatial Econometric Analysis. Journal of Cleaner Production, 175, 431-441. https://doi.org/10.1016/j.jclepro.2017.12.001
  23. Im, K.S., Pesaran, M.H., & Shin, Y. (2003). Testing for Unit Roots in Heterogeneous Panels. Journal of Econometrics, 115(1), 53-74. https://doi.org/10.1016/S0304-4076(03)00092-7
  24. Jeffrey, C., & Perkins, J.D. (2015). The Association Between Energy Taxation, Participation İn An Emissions Trading System, And The İntensity Of Carbon Dioxide Emissions İn The European Union. International Journal of Accounting, 50(4), 397-417. https://doi.org/10.1016/j.intacc.2015.10.004
  25. Kao, C., & Chiang, M.H. (2000). On The Estimation And Inference Of A Cointegrated Regression In Panel Data. Advances in Econometrics, 15, 179-222. https://doi.org/10.1016/S0731-9053(00)15007-8
  26. Kartal, M.T. (2024). Quantile-Based Effect of Energy, Transport, and Total Environmental Tax on Ecological Footprint in EU5 countries. Environmental Science and Pollution Research, 31(13), 20033-20047. https://doi.org/10.1007/s11356-024-32214-3
  27. Levin, A., Lin, C.F., & Chu, C.S.J. (2002). Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics, 108(1), 1-24. https://doi.org/10.1016/S0304-4076(01)00098-7
  28. López, R., & Palacios, A. (2014). Why has Europe Become Environmentally Cleaner? Decomposing the Roles of Fiscal, Trade and Environmental Policies. Environ Resource Econ, 58, 91-108. https://doi.org/10.1007/s10640-013-9692-5
  29. Ma, B., Sharif, A., Bashir, M., & Bashir, M.F. (2023). The dynamic influence of energy consumption, fiscal policy and green innovation on environmental degradation in BRICST economies. Energy Policy, 183, 113823. https://doi.org/10.1016/j.enpol.2023.113823
  30. Moomaw, W.R., & Unruh, G.C. (1997). Are Environmental Kuznets Curves Misleading Us? The Case of CO2 Emissions. Environment and Development Economics, 2(4), 451-463. https://doi.org/10.1017/S1355770X97000247
  31. Morley, B. (2012). Empirical Evidence on The Effectiveness of Environmental Taxes. Applied Economics Letters, 19(18), 1817-1820. https://doi.org/10.1080/13504851.2011.650324
  32. Moshiri, S., & Daneshmand, A. (2020). How effective is government spending on environmental protection in a developing country ? An empirical evidence from Iran. Journal of Economic Studies, 47(4), 789-803. https://doi.org/10.1108/JES-12-2018-0458
  33. Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics, 61, 653-670. https://doi.org/10.1111/1468-0084.61.s1.14
  34. Pedroni, P. (2001). Fully modified OLS for heterogeneous cointegrated panels. In Baltagi, B.H., Fomby, T.B. and Carter Hill, R. (Eds.) Nonstationary Panels, Panel Cointegration, and Dynamic Panels (Advances in Econometrics, Vol. 15, pp. 93-130), Emerald Group Publishing Limited, Leeds, https://doi.org/10.1016/S0731-9053(00)15004-2
  35. Phillips, P.C.B., & Hansen, B.E. (1990). Statistical İnference İn İnstrumental Variables Regression With I(1) Processes. Review of Economic Studies, 57(1), 99-125. https://doi.org/10.2307/2297545
  36. Postula, M., & Radecka-Moroz, K. (2020). Fiscal policy instruments in environmental protection. Environmental Impact Assessment Review, 84, 106435. https://doi.org/10.1016/j.eiar.2020.106435
  37. Rafique, M.Z., Fareed, Z., Ferraz, D., Ikram, M., & Huang, S. (2022). Exploring the heterogenous impacts of environmental taxes on environmental footprints: An empirical assessment from developed economies. Energy, 238. https://doi.org/10.1016/j.energy.2021.121753
  38. Saikkonen, P. (1991). Asymptotically Efficient Estimation Of Cointegration Regressions. Econometric Theory, 7(1), 1-21. https://doi.org/10.1017/S0266466600004217
  39. Selden, T.M., & Song, D. (1994). Environmental Quality and Development: Is There a Kuznets Curve For Air Pollution Emissions?. Journal of Environmental Economics and Management, 27(2), 147-162. https://doi.org/10.1006/jeem.1994.1031
  40. Şentürk, H., Omay, T., Yildirim, J., & Köse, N. (2020). Environmental Kuznets Curve: Non-Linear Panel Regression Analysis. Environmental Modeling and Assessment, 25(5), 633-651. https://doi.org/10.1007/s10666-020-09702-0
  41. Shahbaz, M., Haouas, I., & Hoang, T.H. Van. (2019). Economic Growth And Environmental Degradation in Vietnam: Is The Environmental Kuznets Curve a Complete Picture?. Emerging Markets Review, 38, 197-218. https://doi.org/10.1016/j.ememar.2018.12.006
  42. Shahbaz, M., Lean, H.H., & Shabbir, M. (2011). Environmental Kuznets Curve and The Role Of Energy Consumption In Pakistan. MPRA Paper No. 34929, 1-32. Retrieved from https://mpra.ub.uni-muenchen.de/34929/ on June 20, 2023.
  43. Soytas, U., Sari, R., & Ewing, B.T. (2007). Energy Consumption, İncome, And Carbon Emissions in the United States. Ecological Economics, 62(3-4), 482-489. https://doi.org/10.1016/j.ecolecon.2006.07.009
  44. Stern, D. (2004). The Rise and Fall of the Environmental Kuznets Curve. World Development, 32(8), 1419-1439. https://doi.org/10.1016/j.worlddev.2004.03.004
  45. Stern, D., Common, M., & Barbier, E. (1996). Economic Growth and Environmental Degradation: The Environmental Kuznets Curve and Sustainable Development. World Development, 24(7), 1151-1160. https://doi.org/10.1016/0305-750X(96)00032-0
  46. Stock, J., & Watson, M. (1993). A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems. Econometrica, 61(4), 783. https://doi.org/10.2307/2951763
  47. Tabiloğlu, D. (2022). Effectiveness of financial policies to protect the environment in the struggle against environmental problems (Ph.D. Thesis). Sakarya University. Retrieved from https://acikerisim.sakarya.edu. tr/bitstream/handle/20.500.12619/100676/T10241.pdf?sequence=1 on August 18, 2025.
  48. Taşdemir, F. (2022a). Development, Trade Openness and Pollution: Is There any Threshold? In H. Dinçer & S. Yüksel (Eds.), Sustainability in Energy (p. 8356). Springer. https://doi.org/10.1007/978-3-030-94051-5_10
  49. Taşdemir, F. (2022b). Industrialization, Servicification, and Environmental Kuznets Curve: Non-Linear Panel Regression Analysis. Environmental Science and Pollution Research, 29(5), 6389-6398. https://doi.org/10.1007/s11356-021-16012-9
  50. Telatar, O.M., & Birinci, N. (2022). The effects of environmental tax on Ecological Footprint and Carbon dioxide emissions: a nonlinear cointegration analysis on Turkey. Environmental Science and Pollution Research, 29(29), 44335-44347. https://doi.org/10.1007/s11356-022-18740-y
  51. Tiwari, A.K. (2011). A Structural VAR Analysis of Renewable Energy Consumption, Real GDP And Co2 Emission:Evidence from İndia. Economics Bulletin, 31(2), 1793-1806. Retrieved from https://www.accessecon.com/Pubs/EB/2011/Volume31/EB-11-V31-I2-P164.pdf on April 15, 2023.
  52. Torras, M., & Boyce, J.K. (1998). Income, Inequality, And Pollution: A Reassessment Of The Environmental Kuznets Curve. Ecological Economics, 25(2), 147-160. https://doi.org/10.1016/S0921-8009(97)00177-8
  53. Usman, O., Iorember, P.T., Jelilov, G., Isik, A., Ike, G.N., & Sarkodie, S.A. (2021). Towards Mitigating Ecological Degradation in G-7 Countries: Accounting for Economic Effect Dynamics, Renewable Energy Consumption, and İnnovation. Heliyon, 7, e08592. https://doi.org/10.1016/j.heliyon.2021.e08592
  54. Villanthenkodath, M.A., Pal, S., & Ansari, M.A. (2024). Unlocking sustainable development: Evaluating the impact of monetary and fiscal policies on ecological footprint in India. World Development Sustainability, 5, 100186. https://doi.org/10.1016/j.wds.2024.100186
  55. Wang, Q., Fan, X., & Zhang, B. (2024). Who will Spend more Pollution Abatement Costs: does Size Matter?. Environmental Management, 73(5), 985-1004. https://doi.org/10.1007/s00267-024-01937-x
  56. Zahra, S., Khan, D., & Nouman, M. (2022). Fiscal policy and environment: a long-run multivariate empirical analysis of ecological footprint in Pakistan. Environmental Science and Pollution Research, 29(2), 2523-2538. https://doi.org/10.1007/s11356-021-15665-w
  57. Zhang, X.P., & Cheng, X.M. (2009). Energy Consumption, Carbon Emissions, and Economic Growth in China. Ecological Economics, 68(10), 2706-2712. https://doi.org/10.1016/j.ecolecon.2009.05.011

Downloads

Download data is not yet available.