Growing the Global Economy through Climate Change Mitigation: A Causal Mediation Analysis of Environmental Taxes and Green Incentive

The purpose of this study is twofold. First, given the lack of convergence of empirical studies on the direction and impact of climate change on economic growth, this study seeks to present much robust coefficients of climate change impact on economic growth. Second, the study seeks to confirm the double dividend hypothesis that the introduction of environmental taxes in an economy induces growth, and further examine how environmental tax as environmental regulatory policy can be strengthened for effective mitigation. This study regresses a large panel of 104 countries consisting of a total population of countries that have successfully implemented environmental tax over a 26-year period between 1994–2019. The results show that increase in climate change reduces economic growth on all models, with significant adverse effect in the long-run, and across higher distributions of growth. For a change in temperature by one degree Celsius will result in an adverse change in economic growth by 0.463% and 0.424% at 5% significance level using Fixed Effect and Random Effect model respectively, while that of Diff GMM and Sys GMM show that for a unit change in surface temperature, economic growth will decline by 0.996% and 1.08% respectively at 1% significance level. Both environmental taxes and green incentives have significant contingent effects on climate change, with green incentive having a greater effect. Results of the Causal Mediation Analysis (CMA) reveal that the implementation of strong environmental regulatory framework reduces climate change by 0.425% at 1% significance level. In addition, previous studies that examined the implementation of environmental tax and its impact on economic growth have either revealed an adverse effect or a positive effect. This study goes further to estimate the activity levels that yield either effect, thereby providing a bridge between the proponents and opponents of the tax interactive effect of the double dividend hypothesis. This finding is an opportunity for re-examination of the double dividend of environmental taxes in the context of activity level. It further provides clear guidance to policymakers on how to achieve double dividend with the implementation of environmental tax.