Unpacking the Green Box: Endogenous Preferences and Environmental Policy Stringency in European Countries

This paper identifies the determinants of OECD Environmental Policy Stringency (EPS) index using a panel of 21 European countries for the period 2009-2019. If there is a large literature on the macroeconomic, political, and social determinants of EPS, the people's attitudes or preferences towards environmental policies is still burgeoning. Thus, the main goal of this paper is to estimate the effects of people's awareness regarding environmental issues on the EPS indicator. Due to the endogeneity of preferences, we have applied an instrumental variable framework to estimate our empirical model. Our most important result is to show that individual environmental preferences do have a positive and significant effect on the level of EPS indicator once the endogeneity bias has been taken into account : on average, a rise in individual preferences of 1% in a country will increase its aggregate EPS indicator by at least 0.23%. Furthermore, it is worth noting that the channels through which individual environmental preferences influence the EPS primarily operate via market and technological instruments. In these two cases, the estimated elasticities are almost three times higher than on the aggregate index. Our results have important policy implications.