The effect of environmental tax on CO2 emissions in Romania: an ARDL-linked cointegration approach
Authors: Obwori Alwago Wycliffe , David Delia , Sgardea Florinel Marian , Marais Stacey-Lee 
Published: February 2025

Purpose

Climate change, driven by global warming, poses a significant threat to humanity and disrupts the ecological balance. In Europe, concentrations of air pollutants remain very high, and problems related to air quality and the acceleration of the phenomenon of global warming persist. As a result, carbon taxation has emerged as a key strategy to mitigate climate change. In Romania, environmental taxes are an important instrument of environmental policy as an economic instrument for environmental protection and natural resource management. Using 1990–2021 time series data and an Autoregressive Distributed Lag (ARDL) Bounds cointegration for long-run analysis and the Toda–Yamamoto test for causality analysis, we investigated whether environmental taxes, renewable energy consumption, urbanization and economic growth significantly impact CO2 emissions in Romania.

Design/methodology/approach

This paper differs from the assessment of the Environmental Kuznets Curve (EKC) hypothesis (Grossman and Krueger 1991) and instead aims to determine the impact of environmental taxes, renewable energy consumption, per capita GDP and urbanization on CO2 emissions in Romania. The study investigates both short- and long-term effects, as well as Toda–Yamamoto causality linkages (Toda and Yamamoto 1995) between these variables. We adopt an ARDL estimation technique with Bound cointegration test and error correction models (Pesaran et al., 2001) to examine the short- and long-term effects.

Findings

The findings revealed that environmental taxes positively and significantly reduce CO2 emissions, while urbanization induces CO2 emissions, in the long run. Moreover, in the short run, environmental taxes and renewable energy consumption significantly reduce CO2 emissions while per capita GDP and urbanization significantly increase CO2 emissions. A unidirectional causality exists between renewable energy consumption and CO2 emissions. Thus, to realize its 34% target of renewable energy consumption in 2030, Romania should prioritize the implementation of the Casa Verde Plus program and enforce sustainable urban planning to meet near-zero energy standards. Consequently, the government should continue to enforce carbon taxes to promote environmental sustainability.

Originality/value

Empirical evidence supports the cointegration relationship between environmental taxes and CO2 emissions, with carbon taxes effectively reducing CO2 emissions and improving environmental quality (Allan et al., 2014; Polat and Polat, 2018; Kiuila et al., 2019, etc.). While existing research (Floros and Vlachou, 2005; Wissema and Dellink, 2007; Aydin and Esen, 2018; Lin and Li, 2011) primarily focuses on country-specific or regional analyses, limited research has been conducted on the impact of carbon taxation on CO2 emissions in Romania. However, to the best of our knowledge, limited research on this phenomenon in Romania exists in response to recommendations for climate change mitigation. Furthermore, urbanization has significantly contributed to rising atmospheric carbon levels and subsequent global warming and climate change (Woldu, 2021). As economic growth, particularly in countries like Romania, drives urbanization, it leads to increased energy demand, expanding urban areas and mounting environmental concerns. This process involves industrial restructuring, and the development of new infrastructure, all of which exert pressure on energy consumption and CO2 emissions (Niu and Lekse, 2018). While economic growth is a primary objective, industrialization and urbanization inevitably generate unintended consequences, including CO2 emissions. However, limited research exists on the impact of urbanization patterns on CO2 emissions in Romania. This study investigates the dynamic causal relationships among urbanization, per capita GDP, carbon taxes, renewable energy consumption and CO2 emissions, considering both short-run and long-run effects in Romania.