Analysis of Carbon Tax on Selected European Countries: Does Carbon Tax Reduce Emissions?

Abstract

Since the first days of its existence, the humanity had been using natural resources to meet its needs. Especially along with the globalization period as a result of the Industrial Revolution and the rapid development of communication technologies within the last fifty years, the production has increased significantly in the world and has created negative effects on the environment. The leading adverse effects involve the emission of greenhouse gases and the global warming, which stem from the energy supply of fossil fuels as the main inputs of production. The global warming can be described as an increase in temperature worldwide. Irreversibility is the most important feature of the global warming. Therefore, in the absence of objective measures, the future costs would be much higher than the current ones. For this reason, governments need to take various measures to reduce the volume of emissions. The most important of these measures is carbon taxes. Carbon taxation encourages individuals to use fewer fossil fuels and to find new sources of energy by increasing the cost of using fossil fuels that cause carbon dioxide emissions through the price mechanism. To this end, the impacts of carbon tax levied in 18 selected European countries on economic growth, urbanization, natural gas and petroleum usage, and CO₂ emissions are examined by panel data analysis for the 1995-2015 period. The analysis results indicate that a 1% increase in environmental taxes reduces carbon dioxide emissions by 0.9%. Furthermore, it is reported that a 1% increase in natural gas and petroleum consumption among the variables included in the analysis increased carbon dioxide emissions by 0.1% and 0.7%, respectively; while a 1% increase in urbanization reduced carbon dioxide emissions by 0.9%.