Threshold effects of environmental tax on climate vulnerability

Hong Chen, Baljeet Singh, Partha Gangopadhyay, Tauhidul Islam Tanin and Narasingha Das

International Review of Economics & Finance, 2025, vol. 103, issue C

Abstract: An environmental tax promotes economic sustainability and boosts tax revenue, but decreases national welfare due to the tax multiplier effect, affecting government spending on climate vulnerability reduction. This implies a complex relationship between environmental tax and climate vulnerability. We examine how environmental tax influences climate vulnerability by focusing on its threshold effects that are dependent on government expenditure. Using a dual-threshold model, fixed-effect threshold generalized method of moments estimator, and balanced panel data from 31 countries for 2001–2018, we consistently find direct (transforming) and indirect (threshold) effects of environmental tax. Specifically, the threshold effects show that, contingent on government expenditure, the impact of environmental tax is greater at low or high levels than at medium levels. Furthermore, carbon emissions increase climate vulnerability, whereas GDP and manufacturing development decrease it. This study underscores the necessity for customized environmental tax policies to optimize government spending and effectively reduce climate vulnerability.

Keywords: Vulnerability; Environmental tax; Green energy transition; Threshold effect; Fixed-effect threshold generalized method of moments (FETHGMM) estimator (search for similar items in EconPapers)
JEL-codes: C33 E39 H23 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:103:y:2025:i:c:s1059056025005921

DOI: 10.1016/j.iref.2025.104429

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