Examining the Welfare Dimensions of Environmental Tax Policies: Evidence from Climate Vulnerability, Employment Vulnerability, and Income Inequality

Abstract

This study investigates the welfare implications of environmental tax policies, focusing on three key welfare dimensions, i.e., climate change vulnerability, vulnerable employment, and income inequality. Using a global panel dataset comprising 92 countries from 1994 to 2020, the analysis employs the Method of Moments Quantile Regression with fixed effects (MMQR) to establish baseline results. Robustness checks are conducted using bootstrap simultaneous quantile regression and hierarchical regression methods. The empirical findings reveal that environmental taxation significantly and negatively influences all three welfare indicators, suggesting a positive association between such policies and national welfare outcomes. This implies that environmental taxation is a strategic fiscal policy tool for addressing the welfare of the global citizenry. Notably, the effects of environmental taxation exhibit fascinating tail dynamics, particularly regarding the climate change vulnerability and vulnerable employment. The results also reveal fascinating tail dynamics, particularly regarding the climate change vulnerability effects of environmental taxation. In countries with the lowest vulnerability, the effect is insignificant, whereas it is significant for those in the highest vulnerability band. In terms of vulnerable employment, while the effects of environmental taxation are significant in countries with lower vulnerable employment, they are insignificant, particularly for those in the highest band. These heterogeneous effects highlight the importance of tailoring environmental tax policies to national contexts. The results align with several Sustainable Development Goals (SDGs), including SDG 8 (Decent Work and Economic Growth), SDG 10 (Reduced Inequality), and SDG 13 (Climate Action), supporting the role of environmental taxation as a tool for sustainable development.