Do Environmental Tax and Energy Matter for Environmental Degradation in the UK? Evidence from Novel Fourier-Based Estimators

Abstract

Currently, the UK has ambitious plans to reach net zero by 2050, despite other countries such as Russia and India targeting 2060 and 2070, respectively. Assuming that the UK emissions unceasingly decline at a given rate annually towards achieving net zero by 2050, its economy would need to ensure a reduction of 105 MtCO2 per year of its emissions from the current 2021 levels. Given that global greenhouse gas emissions have not peaked and continue to rise, the UK seeks to implement costly and aggressive emission reduction policies towards fulfilling commitments under the 2021 Glasgow Climate Pact. This paper investigates the effect of environmental taxes on environmental degradation in the UK between 2000Q1 and 2019Q4 using novel Fourier approaches. Using the novel Fourier ARDL estimator, the long-run equilibrium estimates indicate that gross domestic product and environmental tax cause a fall in carbon emissions. However, in trade and primary energy use, a unit change caused rising carbon emissions in the UK. Especially, the results indicate that environmental taxes have a negative effect on environmental degradation in the UK, and ecological tax policy could be considered as an effective channel to attain environmental sustainability. The outcome provides the following policy insights: (i) The government of the UK should support international environmental tax coordination mechanisms, especially on carbon pricing, to avoid relocation of carbon-intensive investments. (ii) The UK government must note that imposing more taxes to encourage emissions reductions could bring complexity to the tax system and unnecessarily bring costly ways to deal with climate change. Higher domestic electricity prices could disproportionately hit low-income households and create distributional cost concerns, which require benefit payouts or compensation schemes. (iii) Switching to electric vehicles simultaneously requires investments in charging infrastructure and battery technologies. To avoid this chicken-and-egg problem, the government of the UK could play a coordinating role, including deploying targeted subsidies, regulations, direct government involvement, or setting higher carbon prices in special cases.