Do environmental taxes improve environmental sustainability beyond net-zero emissions? Evidence from ecological footprint subcomponents in the EU

Environmental degradation has manifested in various forms, including air and water pollution. Therefore, the impacts of environmental policies should be evaluated across all dimensions of environmental degradation. The European Union has targeted to stop CO2 emissions by 2050. Accordingly, the literature has predominantly focused on the relationship between environmental taxation and CO₂ emissions. Even if the net-zero emissions target is achieved, this does not necessarily ensure the elimination of overall environmental degradation. This study investigates the impact of environmental taxation on environmental degradation in the European Union over the period 1995–2021 using the Driscoll-Kraay (1998) estimator. The study focuses on the impact of environmental tax on ecological footprint and its subcomponents. The findings show that the ecological footprint and its subcomponents, except for built-up land and forest product footprints, can be mitigated by current environmental tax policies. However, in order to achieve net-zero environmental degradation, the European Union must reduce pressures arising from built-up land and forest product footprints. In addition to the Driscoll-Kraay (1998) estimator, the Feasible Generalized Least Squares (FGLS) estimator is employed as a robustness check, and the results remain broadly consistent across both methods. Moreover, Dumitrescu and Hurlin (2012) causality test states that strong and bidirectional causal relationships between environmental tax and ecological footprint components. This overall result confirms the existence of a green dividend within the double dividend hypothesis. It is suggested that renewable energy plants should be constructed in areas where built-up land and forest products footprint are not affected. For example, floating solar panels do not use land and also protect water bodies from evaporation.