Measuring the effects of environmental tax policy on construction sector’s GHG emissions: Empirical evidence from EU countries

Abstract

EU Member States are engaged in understanding the mechanisms that create opportunities and threats for the market in order to be in a position to adjust their behavior towards the environmental challenges. Several policy instruments have been used over the last decades, amongst which taxation, with the prospect of obtaining rapid and effective outcomes in response to environmental degradation. Within the context of policy intervention and monitoring that needs to be performed in order to assess the response of the market, the present study aims to examine whether the environmental tax policy of the construction sector in European countries can be deployed as an effective tool towards mitigating GHG emissions. Despite the extent of literature on the effects of environmental intervention models applied in the European area, mainly through the implementation of the environmental tax reform (ETR), surprisingly limited analysis is performed focusing on the construction sector. By adopting econometric techniques, this study concentrates on the specific sector and aims to investigate and quantify the regulatory impact of taxation on GHG emissions within the EU area. The study also addresses the issue of endogeneity of variables, through the use of the Control Function (CF) approach. Overall, the evidence of the study indicates that the decrease caused by taxation on GHG emissions is valid, however, there is variation across categories of countries. The study also suggests considerations for policymakers, specifically towards environmental taxation policy, exploring how taxation can be used as an intervention instrument to provide the market the essential time to adjust to the need for mitigating the environmental degradation, while at the same time, ensure revenues and maintain environmental goals.