Environmental Impact Assessment Review 84 (2020) 106435
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Environmental Impact Assessment Review
journal homepage: www.elsevier.com/locate/eiar
Fiscal policy instruments in environmental protection
a,⁎ b
Marta Postula , Katarzyna Radecka-Moroz
a
Faculty of Management, Warsaw University, ul. Szturmowa 1/3, 03-678 Warszawa, Poland
b
European Court of Auditors, 12, Alcide de Gasperi, 1615 Luxembourg
1. Introduction
The need for greater government involvement in implementing
sustainable development values and goals requires effective solutions to
be found and applied by national authorities. Environmental protec-
tion, being one of the fundamental tenets of sustainable development, is
a task that certainly calls for support from public finance. The aim of
this research is to determine the extent to which the spending and tax
policies of European Union member states can have a real impact on
changing strategic European environmental protection indicators. The
authors wish to examine whether, and if so to what extent, the fiscal
measures taken by respective EU countries' authorities (taking into
account the wealth of societies) influence the impact on environmental
protection indicators. The authors will attempt to prove the hypothesis
that in order to improve the effectiveness of environmental protection
measures, a policy mix should be adopted involving tools in both
spending and revenue (hypothesis 1). We will also try to demonstrate
that air quality management in EU countries is determined differently
for wealthy and other EU member states, and depends on the tax and
spending instruments in place (hypothesis 2). Moreover, the article will
draw attention to the impact of environmental protection measures on
the living standard of the population measured with GDP per capita,
namely by testing whether the growing national wealth corresponds
with an increase of public spending on environmental expenditure, and
reflects the level of corresponding environmental taxes imposed, ulti-
mately influencing the level of environmental pollution. It is important
to conduct research on which of the instruments, namely taxes or
spending, are more efficient in exerting an impact on market players in
the context of reducing the environment pollution with various gases.
The article will also attempt to indicate for which gas emission in-
dicators more measurable effects are ensured by implementing tax so-
lutions in the form of additional pollution fees, and where support by
public spending is more reasonable.
A mixed methodology combining the results of qualitative and
quantitative research is used to empirically verify the hypotheses re-
lated to the research problem presented. Qualitative research is based
on descriptive analysis, and the quantitative research will include the
method of statistical information systemization, based on statistical
source data analysis, and static dependence methodology, including
⁎
Corresponding author.
E-mail addresses: mpostula@wz.uw.edu.pl (M. Postula), katarzyna.radecka@eca.europa.eu (K. Radecka-Moroz).
https://doi.org/10.1016/j.eiar.2020.106435
Received 20 November 2019; Received in revised form 13 June 2020
Available online 26 June 2020
0195-9255/ © 2020 The Authors. Published by Elsevier Inc. This is an open access article under the CC BY license
(http://creativecommons.org/licenses/BY/4.0/).
T
fixed effect panel models.
2. Government's involvement in the economy as a significant tool
but only where its action is effective
Classical economic theories ignored the relationship between the
economy and natural environment. Moreover, in a linear economy it
was wrongly assumed that natural resources necessary to continuously
drive the economic growth are inexhaustible – such type of economy
was dubbed cowboy economy (K.E. Boulding, 1966).
The phenomenon of climate crisis has exposed the imperfection of
the existing economic theories, and consequently of the way it is re-
flected in the economic and social policy in place.
It turned out that the political and social expectations focusing on
sustainable development, financial stability and on mitigating the
economic and social vulnerability require new economic paradigms and
efficient national and international institutions. Preventive legislation
which sets the effective course of action for the government and helps
avert crises, as well as modified economic propositions and social ex-
pectations as to how government and public services should function,
have become the substance and organisational characteristics of poli-
tical sciences, and to find the way to make science reflect the processes
taking place has become one of the key challenges of our time.
An interesting perspective was presented by Funtowicz and Ravetz
(1993) in their concept of post-normal science, which argues that a
positivist, linear approach to science is part of the problem that is
present-day environmental crisis, and demonstrates the ineffectiveness
of the “puzzle-solving” suggestions offered to date (Kuhn, 1997) which
fail to take account of the system complexity in solving our top chal-
lenges of today. Post-normal science accepts the existence of the in-
herent contradictions and inconsistencies. A good example of such a
seemingly unsolvable conflicts would be our constant pursuit of de-
velopment and enrichment while the planet's limited resources neces-
sary to achieve this ambition are running out (Rockstrom et al., 2009).
There is no single scientific method to solve this antagonism and that's
why the role of science in this perspective is defined as the initiator of
the mutual learning process rather than an objective supplier of final
solutions.
Irrespective of the research aimed to resolve the dispute within
M. Postula and K. Radecka-Moroz
economic theory, it is desirable to focus attention on the economic
policy actually implemented and on its outcomes for stable develop-
ment, and thus to approach the problem relying on basic fiscal policy
parameters related to the scale of GDP redistribution and to the growth
rate achieved, while taking account of the policy's underlying qualita-
tive factors related to social customs, procedures, legal regulations and
their application. The choice of the adequate scale of redistribution,
measured with the revenue- and expenditure-to-GDP ratio, and the
achievement of the desirable growth rate represent a fundamental
problem for policymakers responsible for a given country's medium-
term social and economic development, irrespective of the political
option they represent. The contemporary economic policy implemented
in different countries should also take account of the changing internal
and external determinants.
External factors include the constant globalisation of processes, and
membership of supra-national communities such as the European Union
(EU). With respect to the ongoing globalisation G.W. Kolodko believes
that “The world is facing new challenges as globalization has entered a
new stage. What should we expect in terms of interrelations between
not only market and government but also the three fundamental com-
ponents of economic activity: market, government and the world”
(Kolodko, 2013). On the other hand, economic policy coordination
measures implemented by member states and the European Community
alike may have direct or indirect implications for the fiscal policy and
income distribution (Adam et al., 2014). It is hard to give a straight
answer to the question of which solution will be optimal in a given
country and what is the role of the EU in this process. There are a
number of differing views on what the most effective economic policy-
making and implementation tools are and on the role of supranational
communities and associations in this respect; however, it's worth
bearing in mind that they can enhance the effectiveness of individual
country-level measures (Sun and Ryzin, 2014).
Countries supported with measures taken by communities such as
the European Union as part of the initiatives undertaken aim to im-
plement economic solutions that are based on the concept of sustain-
able development, which requires adopting a long-term finance per-
spective for critical infrastructure, such as natural environment, and
addressing long-term threats (European Commission, 2018). It is also
concluded that as part of those actions the objective of sustainable
development must be supported by sustainability finance
(Shrithongrung and Kriz, 2014). Actions undertaken as part of the
sustainability finance concept could contribute to re-orienting finance
measures and to strengthening the efforts to generate a long-term po-
sitive impact on the socio-economic development (Collignon, 2008). A
particular role and importance in this respect is ascribed to public au-
thorities, which use public finance to achieve sustainable development,
of which environmental protection is one of the main goals.
It is worth emphasising here the fundamental significance of the
following three values in the concept of sustainable development:
protection of the environment understood as a shared habitat of human
and non-human animals, responsibility for future generations, and so-
cial justice (Miller et al., 2014). Hence, public authorities have two
tasks as it were: firstly, to integrate these values as the basis for its
action, and, secondly, to work out effective tools for implementing
goals pertaining to the concept of sustainable development. The process
of transforming the current understanding of public authorities' tasks
should come hand in hand with a non-stop dialogue on the practical
interpretation of the sustainable development concept, with a broadly
defined public and with the academic community and administration
alike. The aforementioned natural environment is one of the three
common denominators (the other two being social and economic is-
sues) underlying sustainable development goals (SDG) adopted in 2015
by the UN. It is worth pointing out that the approach to SDG fulfilment
is in essence about combining those three dimensions and developing
integrated indicators of their implementation. The decision to no longer
treat environmental issues as separate ones aims to avoid the problems
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Environmental Impact Assessment Review 84 (2020) 106435
and imperfections identified in the previous model, where this very
fragmentation of environmental goals was seen as one of the major
barriers to the effective accomplishment of the objectives at hand. With
this new approach in place, environmental issues have been in-
corporated in a great majority of SDGs and there is a commitment to
interpret socio-economic development only in a manner that benefits
the natural environment and its resources. In line with this approach,
environmental protection plays a fundamental role in the sustainable
development concept and, at the same time, poses challenges involved
in providing specific solutions, ways to implement them and measure
their effectiveness.
In this context and in the globalised world it is, therefore, necessary
to create contemporary solutions regarding the financing of global
(horizontal) tasks, informed by certain economic schools of thought; to
create an element of a cash flow structure between countries, regions
and continents modelled on the cash flow structure functioning in many
countries, and to divide tasks between them. Similarly as in the case of
national-level policy where one can identify various tasks that can be
pursued either by given local government or by central government,
here, they could be pursued either by a given country or by the
European Union as a whole or even on a global level, by the whole
world (Rambarran, 2015; Davidson, 2017; del Granado et al., 2018). In
such a situation one should take into consideration that the challenges
of the new, more complex reality may call for new, more complex re-
cipes for the reality around us and for policy implementation.
3. Environmental protection as a common task effectively
implemented on a global level
Presently, the point of departure for conducting a performance as-
sessment of environmental policy implementation is its assessment on
the national level. An analysis of spending indicators for respective
member states between 1995 and 2018 suggests an uneven approach to
environmental issues in respective countries (Dumciuviene et al.,
2015). These issues are discussed more in-depth in section four, while
here the focus is only on their influence on the impact and outcome
indicators.
It is worth examining here the difficulties in defining the sustainable
development indicators. Each indicator can only represent certain as-
pect or simply one side of the coin, and therefore we need skills and
experience to use them wisely, especially if we want to inform policy-
makers. We should always keep in mind that indicators can “(1) reveal ,
(2) suggest , (3) distort and (4) conceal, but as objects of design, they
provide policy-relevant information rather than simple facts” (Ravetz,
2018). They should also vary depending on their function, e.g. for
policy-making or educational purposes.
The Ecological Footprint is one of informative examples. It was
created in the late nineties and has evolved since then (Wackernagel
et al., 1997). Currently it is used to measure one important aspect of
sustainability: how much biocapacity humans demand, and how much
is available. This indicator serves well the educational purpose. It
makes us aware of the environmental burden that we, as individuals,
create on every-day basis. In other words, it helps us understand our
contribution to the environmental crisis. Yet, it has its own limitations.
There are certain elements, specific to a particular country or a region,
that cannot be accurately reflected in this indicator and therefore
render it unacceptable. For example, Luxembourgish authorities ques-
tioned the accuracy of this indicator, as the contribution of tank-tourists
of cheap alcohol and fuel (Luxembourg imposed low taxes on these
products) distorted the Luxembourgish footprint enormously.
Yet another important issue should not be neglected when designing
indicators. If we think about the way indicators are formulated, we can
classify them in two broad categories: experts-led top-down and com-
munity-based bottom–up. (Prabhu et al., 1999; Mendoza et al., 1999;
Reed et al., 2006). In the basic top-down approach, a previously gen-
erated set of is used initially and a team of experts adapts and modifies
M. Postula and K. Radecka-Moroz
this set according to the local situation (Prabhu et al., 1999; McDougall
et al., 2009). In the bottom-up approach, local communities actively
engage in the development process in a participatory manner based on
their perception of the individual situation (Prabhu et al., 1999). The
accounting for sustainable development is not a new concept, but there
is some criticism regarding the value of information gathered until now,
as the already developed indicators do not necessary measure sustain-
able development issues at the local level and may not capture in-
formation essential for local communities (Reed et al., 2006). As Lux-
embourgish case study shows, due to these constraints, essential
elements may not be taken into account. In consequence of such lim-
itations, local authorities/groups may not be willing to invest in col-
lecting necessary information. In some cases, because of that, all the
benefits that citizen science brings may be lost. Therefore, it is im-
portant to engage relevant stakeholders in both development and
practical application of the indicators. As experience demonstrates, in
some cases such a collaborative process may contribute positively to the
quality and quantity of the proposed indicators. It can also lead to a
better understanding of environmental and social problems, enhance
community capacity building, but also contribute to policy formulation
process.
The current biggest challenge is to combine these two types of ap-
proach, top-down and bottom-up, and benefit from the values that both
propose.
We should also not forget that indicators are defined in the political
process and therefore may, in some cases, be selected to bring benefits
to those in power. If we think about the indicators shaped to trace the
national progress on SDGs, we should keep in mind that the UN fra-
mework provides a wide portfolio of areas that can be chosen by na-
tional authorities to concentrate and consequently report on. In order to
obtain a reliable picture of the situation in a particular country, we
must be convinced that the selected SDGs were objectively chosen as
the ones that require the biggest focus in terms of action and finance.
The opposite scenario is possible as well. Namely, the national autho-
rities may select the SDGs that will allow them to concentrate public
efforts on issues that have the biggest chances to bring the government
ad hoc political benefits instead of selecting goals whose fulfilment may
be in reality more needed, but which are more difficult to achieve and
have a potential to generate social tensions. This is why trust between
the citizens, scientists and political authorities is of crucial importance,
as we need to trust that the right problems are addressed.
National authorities may use a number of fiscal instruments for
environmental protection measures, the most significant of which are
taxes and public spending. As a matter of fact, public transfers are at the
core of public finance understood as the processes of raising and allo-
cating public funds. Public transfers relate to the fulfilment of the re-
distributive, allocative and stabilising functions as part of the public
finance system (Musgrave Musgrave, 1985). The redistributive function
has a direct impact on the revenue structure, and then an indirect one
on the production, meaning that this instrument, when used for en-
vironmental protection, may contribute to a change in citizen and en-
trepreneur behaviours in the future. Meanwhile, the effect of the allo-
cative function involves mainly the structure of production. Public
transfers being part of the fiscal policy are intended to change the very
structure of Gross Domestic Product generation and distribution. An
assessment of the impact of public spending and taxes on the economic
growth and environmental protection is not easy and evolves in parallel
with the developments in the economic and social thought (Gosh et al.,
2009; Rogoff and Reinhart, 2009; Boston et al., 1996). The direction
and consequences of income redistribution and, ultimately, of public
spending depend on the growth theory on which the analysis is based.
The alleged consequences of the public spending increase that are po-
sitive, neutral or negative for the economic growth vary between re-
spective schools of economic thought (new classical, neoclassical,
neoKeynesian economics or the real business cycle theory). It still does
not solve, however, the core dilemma related to the effect of spending
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Environmental Impact Assessment Review 84 (2020) 106435
on growth – programmes implemented with the use of public spending
can have all sorts of positive impact on the economic growth. Firstly,
public goods are provided thanks to public spending, secondly – public
spending is a source of products and services intended to fix market
imperfections and improve performance. The basis for evaluating the
consequences of public spending for sustainable development are ana-
lyses assessing the effectiveness of public authorities exerting an impact
on environmental protection indicators through tax and spending in-
struments, taking account of the wealth of respective countries' socie-
ties.
A number of studies aimed to determine the impact of public
spending on the level of environmental pollution are being conducted.
The results obtained indicate that in European countries public
spending have contributed to limiting greenhouse gas emissions, while
in the Middle East the effect was minor or even negative (Abid, 2017).
Similar conclusions were reached in their analyses by Gholipour and
Farzanegan (2018), who, based on data from North African and Middle
Eastern countries, proved that public spending on environmental pro-
tection have no significant impact on the quality of environment. The
amount of public funds spent does not in itself guarantee full success
unless they are managed adequately and effective distribution channels
are created. This is also confirmed by the research conducted in this
article. There are four research trends in investigating the relationship
between the environmental policy in place (the scale of influence of the
available instruments) and the quality of environment. The first group
includes research aimed to assess the impact of respective environ-
mental quality policy mechanisms. Erjavec et al. (2017) argued that
even though various instruments were used as part of the agricultural
policy, they had no significant impact on the level of greenhouse
emissions. Similar issues were dealt with by Neufeldt and Schäfer
(2008), who analysed how the introduction of different instruments of
environmental protection policy would decrease greenhouse gas emis-
sions from farming. The authors emphasised that it is difficult to choose
one mechanism as, for instance, introducing an emission cap means low
costs for farmers while an emission tax is cheaper on a macro scale.
Morley (2012) used a panel composed of EU countries and Norway to
demonstrate that there is a statistically significant negative correlation
between the level of environmental spending and the greenhouse gas
emissions. Hence, tax policy instruments proved effective, which was
not entirely confirmed by the research conducted for the purposes of
this article. Meanwhile, Dholakia et al., 2013 pointed out that another
factor in assessing the effectiveness of air quality policy is the quality
metric used. Rules have contributed, for example in India, to a sig-
nificant reduction of CO2 emissions, while having a limited impact on
NH3. The second research group includes papers investigating the en-
vironmental impact of expenditure across the society, sometimes ex-
pressed as a ratio of GDP. Taking as an example 12 European countries
in the period between 1995 and 2008, López and Palacios, 2014de-
monstrated that public spending played a significant role in reducing
sulphur oxide and ozone emissions. However, no such effect was re-
ported for nitric oxide. Meanwhile, Boston et al. (1996) and Czyżewski
et al. (2019) confirm the correlation between the scale of public
spending in EU-25 countries and the reduction of PM2,5 emissions,
namely it was demonstrated that the higher spending results in much
lower PM2,5. In another research Halkos and Paizanos (2013) analysed
the impact of governmental spending on greenhouse gas emissions in
respective panels and they concluded that although a higher GDP share
of public spending was conducive to the reduction of sulphur and nitric
oxide emissions, there was no such impact on carbon dioxide. Generally
speaking, an indirect effect of public spending is more important and
becomes stronger in parallel with GDP growth and the democratisation
level, which is also analysed in the article by defining two variables
taking account of those elements.
M. Postula and K. Radecka-Moroz
4. Material and methods
4.1. Description of the research method and of data sources
Taking account of the above theoretical discussion, a decision was
made to include in the analysis all EU member states between 2006 and
2018, which use various tax and spending instruments for environ-
mental protection measures. The selection of the period for analysis was
based on the availability, comparability and completeness of the data
from all EU member states. In the analysed period, there were data gaps
resulting from lower availability of data from countries that joined the
EU after 2006, i.e. Bulgaria (2007), Romania (2007), Croatia (2013),
the lack of data on environmental taxes for years 2017–2018 for France
and Bulgaria and about NH3 for four countries throughout the whole
period of time. As regards the data on public fiscal instruments, the
authors opted for using indicators that measure correlations between
the spending-to-GDP per capita ratio and, similarly, the tax amount is
compared with GDP per capita as it is important to indicate whether
respective countries' authorities increase their commitment to en-
vironmental protection in parallel with the society's growing wealth.
This enabled conducting quantitative research to show how the na-
tional authorities' spending and tax policy may drive the values of en-
vironmental protection indicators, and which of the instruments ap-
plied is more effective when it comes to the outcomes achieved.
As for the environment, three indicators were selected for a detailed
analysis, which indicate the condition of the natural environment and
the scale of environmental impact, such as: greenhouse gas emissions1
(GHG emissions in million tonnes CO2 equivalents), NH3 emissions
(tonne) and CO emissions (tonne). This data is sourced from European
Commission databases and it comes from research conducted by re-
search centres that specialise in the topic. The choice of those para-
meters is not random and stems from the fact that as a result of human
activities, all kinds of pollutants are emitted to the atmosphere, some of
which, due to the volume of emissions and the harmful effect on human
health and environment, are subject to measurement of both emission
to air and their content in the air.
The available data from Eurostat databases was used for the ana-
lysis, which according to the Authors present the most objective and
reliable data spanning a sufficient time series for the analysis. Eurostat
collects environmental protection expenditure and tax data through a
joint Eurostat/OECD questionnaire on environmental protection ex-
penditure and revenues; this is based on EU methodology.
In the public sphere, three action areas are defined, which are
classified as the functions of government (COFOG). To analyse func-
tions performed by governments in Europe, a decision was made to use
COFOG classification, as it is an international standard created ex-
clusively for the central and local government institutions by the
Organisation of Economic Cooperation and Development (OECD), and
published by the United Nations Statistics Division. Another argument
in favour of choosing data arranged this way for the analysis was the
availability of comparable data for all EU member states.
The functional classification was also recommendable for the ana-
lysis, because it is intended to group all of the government's areas of
activity by purposes of the actions undertaken. This enables analysing
outlays on respective groups of actions in the consecutive years and
indicating the changes achieved in each group. Such data arrangement
represents a comparative ground in terms of nature and direction of
public spending. In accordance with COFOG classification, spending by
central and local government institutions is divided into 10 main areas
of government influence. One of these categories, spending on en-
vironmental protection includes, without limitation, spending on: waste
1
A greenhouse gas (sometimes abbreviated is a gas that absorbs and emits
radiant energy within the thermal infrared range. Greenhouse gases cause the
greenhouse effect.
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Environmental Impact Assessment Review 84 (2020) 106435
management, waste water management, pollution abatement, protec-
tion of biodiversity and landscape, R&D environmental protection and
environmental protection n.e.c. What is used for analysis in the article
is the group of spending on environmental protection function.
As for tax revenue, Eurostat collects data on environmental tax
revenue by its type - energy taxes, transport taxes, pollution and re-
source taxes, broken down by economic activity (tax payer). These
detailed data become available later than the overall revenue data. The
last reference year for which data is available is therefore 2018. The
share of energy taxes in the total revenue from environmental taxes
differs widely across countries, and this needs to be taken into con-
sideration to properly evaluate the tax burden by taxpayer in the EU
countries. Environmental taxes have been increasingly used to influ-
ence the behaviour of economic operators, whether producers or con-
sumers. These taxes also generate revenue that can potentially be used
by government to increase its expenditure on environmental protection
or efficient management of natural resources.
The choice made is validated by the fact that this data is used by the
European Environment Agency in its analyses. Keeping in mind the
availability of pooled cross-sectional and time-series data, the authors
opted for the panel study method. Using panel samples to build
econometric models helps take account of the variability of the entities
analysed and of the changes observed over time in individual objects,
while ensuring data aggregation. Panel models with dummy variables
and random variable decomposition were used as the research tool.
The formula for basic unobserved effects model can be as follows for
a random cross section observation i:
yit = xit β + c i + uit ; t = 1, 2, …, T
where xit is 1 x K and may include observable variables that vary
across t but not i, variables that vary across i but not t, and variables
that vary across i and t. If i refers to individuals, ci can be called an
individual effect or individual heterogeneity, and corresponding terms
are used for families, firms, cities, and other cross-sectional units. The
uit are called the idiosyncratic errors or idiosyncratic disturbances be-
cause they vary across t as well as across i. It is common for both
methodological papers and applications to specify whether ci is treated
as a random effect or a fixed effect. In the classic approach to panel data
models, ci is referred to as “random effect” whenever it is treated as a
random variable and a “fixed effect” when it is treated as a parameter
that needs estimating for each cross section observation i. Considering
the high number of random draws from the cross section, it's worth
seeing the unobserved effects, ci, as random draws from the population,
same as yit and xit. This is certainly a valid approach from the point of
view of omitted variables or neglected heterogeneity. In modern
econometric terms, “random effect” is tantamount to zero correlation
between the observed explanatory variables and the unobserved effect:
Cov(xit; ci) = 0, t = 1, 2, …, T. In fact, for the statistical inference to be
fully justified, a stronger conditional mean independence assumption, E
(ci|xi1, …, xiT) = E(ci), would be required In applied papers, when ci is
called, for example, an “individual random effect”, an assumption is
probably made that ci is uncorrelated with the xit. Hence, where ci is
referred to as an “individual fixed effect” or a “firm fixed effect”, it
means that ci can be correlated with xit.
4.2. Researching the phenomenon in question
A decision was made to conduct the research using panel models
with environmental indicator values as dependent variables and the
following explanatory variables:
• Public spending on environmental protection per capita in EU
countries to GDP per capita (hereinafter: variable A)
Variable A indicates the dependency of public spending for en-
vironmental protection on citizens' wealth measured by GDP per capita.
M. Postula and K. Radecka-Moroz
Table 1
Analysis of correlations between the variables examined.
Details NH 3 Greenhouse gas CO emissions
emissions emissions
NH3 emissions 1.0000
Greenhouse gas emissions −0.0961 1.0000
CO emissions 0.9424⁎ −0.0929 1.0000
Public spending on 0.1004 0.8817⁎
environmental protection
Public revenue from −0.1583⁎ 0.2860⁎ −0.2969⁎
environmental protection
⁎ ⁎
Variable A 0.9182 −0.0704 0.9304
Variable B −0.2280⁎ −0.3540⁎ −0.2139⁎
Source: Own compilation.
⁎
Significant at 0.05.
The Authors defining this variable wished to analyse whether the
growing national wealth corresponds with an increase of public
spending on environmental expenditure, and ultimately influences the
level of environmental pollution.
• Public revenue from environmental protection per capita to GDP per
capita (hereinafter: variable B) as per categories and subcategories
used by Eurostat.
Variable B indicates the dependency of the public environmental tax
revenues on the citizens' wealth measured by GDP per capita. The
Authors defining this variable wished to analyse whether the growing
national wealth reflects the level of corresponding environmental taxes
imposed, and whether it ultimately mitigates the level of environmental
pollution.
The analysis carried out in order to select the best model for testing
selected variables showed that for all the variables examined, fixed
effect models proved to be the best, for which the parameters of these
models are consistent (see Table 1). Results of the analysis reveal that
environmental measures undertaken by national authorities using
spending tools fail to bring the intended outcome i.e. the pollution level
increases in proportion to the increase in public spending and variable
A. This can have at least two causes, namely the ineffectiveness of non-
global measures taken by individual countries, as already pointed out in
the theoretical section, and the fact that measures undertaken in a given
period may yield results in the form of lower environmental pollution
indicators several years later (in 3 to 4 years because this is the average
lead time of investment projects intended to lower pollution indicators,
shift attitudes to the environmental protection etc.). The situation is
different when it comes to the use of tax instruments, because in their
case there is a negative correlation between the value of variable B and
all indicators measuring the pollution level, which may suggest that
taxes can have a faster impact in terms of reducing the scale of en-
vironmental pollution. Considering the ambiguity of the results ob-
tained, especially with respect to the impact of public spending and of
variable A on the environmental protection, it proved necessary to
conduct further analyses.
Further research was conducted based on data variability analysis,
and fixed effects model estimation (individual). As concerns the in-
dividual fixed effects model, the entity under analysis is an EU member
state, which, by definition, causes the response variable to have sig-
nificantly different values. The simplest assumption in panel models is
the existence of fixed, unknown (not observable) but constant differ-
ences between countries. Hence, as a first step, fixed effects models
were prepared to examine the causes of changes in European Union
member states when it comes to the level of variable A for respective
environmental protection indicators.
The impact of respective variables on the level of NH3 emissions was
analysed taking account of the effect results being felt only in years to
come (see Table 2). The results were estimated based on 144
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Environmental Impact Assessment Review 84 (2020) 106435
Public spending on Public revenue from Variable A Variable B
environmental protection environmental protection
1.0000
−0.2236⁎ 1.0000
⁎
0.9238 −0.2198⁎ 1.0000
−0.5041⁎ 0.3433⁎ −0.2045⁎ 1.0000
observations comprising 24 EU countries (a complete data set is
available only for those countries).
Public spending on environmental protection does not yield in the
long term a real result of reducing the pollution but rather results from
the increase in the environmental pollution. This may stem from the
structure of this spending, as probably most of it does not represent
investment spending of preventive nature, but rather spending to mi-
tigate the consequences of the pollution.
The above claim seems legitimate as “Spending to GDP” yields a real
impact that reduces the pollution level, with each change by 1 per-
centage point reducing the pollution level by 0.9692 units ceteris par-
ibus.
As for taxes, in the current period they do not yield, either, the
desirable outcome of reducing the pollution, however in the long term
(5 years analysed)(the sum total of those coefficients – long-run mul-
tiplier in DL models) the effect is significantly positive, with a tax in-
crease by 1 unit in the current over 5 years yielding a drop in the pol-
lution level by 5.06353 units ceteris paribus.
As regards revenue instruments intended to support NH3 emissions
reduction, one can observe that the variable B defined has an insig-
nificant impact on NH3 reduction, which may suggest that a public
spending instrument is more effective in the battle for environmental
protection. However, such radical conclusions cannot be drawn based
on one qualitative indicator, which is why a similar analysis was con-
ducted for CO and CO2 emissions. The results obtained are presented in
Tables 3 and 4.
The model of the impact of fiscal instruments on CO emissions
(Table 3) was estimated based on 144 observations comprising 24
countries due to lack of complete data for all 28 EU member states, like
in the previous case. This study explains 64.5% of the variance in
pollution between the countries analysed.
For those pollutants public spending in previous periods is sig-
nificant and contributes to reducing the pollution. Over 5 years, 1
spending unit will decrease the pollution by 0.14689 units (the same
methodology – sum total of coefficients for immediate and delayed
effects).
Other variables are statistically insignificant.
In this case, analyses revealed that environmental protection
spending has a significant impact on CO pollution level by reducing it
after 1, 3, 4 years of making the expenditure. The spending increase by
1 unit in the current period will cause the CO pollution to drop in the
long-term (5 years) by 0.12075 (sum total of those coefficients, the so
called long-run multiplier), assuming all other variables remain con-
stant. When it comes to research into tax instruments, it points to a low
effectiveness of the same in reducing CO emissions as the analyses re-
veal that the increase of variable B by 1 unit will cause CO emissions to
drop by 121.8526 units only in the current period.
A more extensive data set was available for examining the third
indicator, i.e. greenhouse gas emissions, because in this case the model
was estimated based on 174 observations comprising 28 countries (see
M. Postula and K. Radecka-Moroz Environmental Impact Assessment Review 84 (2020) 106435

Table 2
Fixed effects model of the impact of fiscal instruments on NH3 emissions.
NH3 emissions Coef. Std. t P > t [95% Conf. Interval]

Public spending on environmental protection

L1. 0.000283 0.0010244 0.28 0.783 −0.0017475 0.0023135
L2. 0.0037913 0.0010419 3.64 0.000 0.0017261 0.0058566
L3. −0.0030962 0.0010432 −2.97 0.004 −0.0051639 −0.0010284
L4. 0.000225 0.0007622 0.30 0.768 −0.0012858 0.0017358
Variable A −66.28311 24.01878 −2.76 0.007 −113.8875 −18.67868

Public revenue from environmental pollution % GDP

L1. 2.810286 3.862271 0.73 0.468 −4.845405 10.46598
L2. −2.569216 3.81916 −0.67 0.503 −10.13945 5.001021
L3. −1.842404 3.316224 −0.56 0.580 −8.415736 4.730927
L4. −0.7361011 2.29375 −0.32 0.749 −5.282711 3.810509
Public spending on environmental protection % GDP −96.92696 27.79474 −3.49 0.001 −152.021 −41.83296
Public revenue from environmental pollution % GDP −18,474.7 25,718.04 −0.72 0.474 −69,452.32 32,502.92
Variable B −24,286.94 25,964.95 −0.94 0.352 −75,748.64 27,174.76
_cons 149.8347 8.524392 17.58 0.000 132.9396 166.7298
sigma_u 180.05341
sigma_e 3.9318284
rho 0.99952337 (fraction of variance due to u_i)

L1 - time delays corresponding to 1, meaning by one year; L2 - time delays corresponding to 2, meaning by two years; L3 - time delays corresponding to 3, meaning by
three years; L4 - time delays corresponding to 4, meaning by four years.
Source: Own compilation.

Table 4). The fixed effects model developed explains in 4% the variance
in pollution between countries and in as much as 75% the variance
within countries.
For these emissions only the spending share of GDP significantly
contributes to reducing the pollution, with an increase by 1 percentage
point reducing the pollution level by 0.860 unit ceteris paribus.
Conversely, the share of taxes does not reduce the pollution level.
As regards greenhouse gas emissions, they are significantly im-
pacted by both variable A and variable B. The model reveals that when
variable A increases by 1 percentage point, the greenhouse gas emis-
sions drop on average by 0.64 unit ceteris paribus. Meanwhile, as for
variable B, it is also statistically significant but it's an inefficient in-
strument as the increase of this share by 1 percentage point causes, on
average, an increase in pollution ceteris paribus.
5. Research results
The Authors' main goal was to check the long-term effectiveness of
the public fiscal measures applied by EU member states to reduce en-
vironmental pollution. We also wanted to observe whether there is a
correlation between the growing wealth of societies and the condition
of the environment. We assumed that, in order to improve the effec-
tiveness of environmental protection measures, a policy mix should be
applied involving tools for both spending and revenue. We tested the
hypothesis by analysing the impact of public spending and environ-
mental taxes on the evolution of environmental indicators for the se-
lected pollutants, using panel models. We also checked whether the
growing national wealth corresponds with an increase of public
spending on environmental expenditure, and whether it reflects the
level of corresponding environmental taxes imposed, ultimately miti-
gating the level of environmental pollution.
The research has proved that our hypotheses were correct, however
under certain circumstances. Neither public spending, nor environ-
mental taxes, applied separately, improve the condition of environment
as desired and therefore a policy mix should be applied in order to fully
harvest the potential of both types of measures.

Table 3
Fixed effects model of the impact of fiscal instruments on CO emissions.
CO emissions Coef. Std. t P>t [95% Conf.

Public spending on environmental protection

L1. −0.0444271 0.0151882 −2.93 0.004 −0.0745297 −0.0143245
L2. −0.027816 0.0174543 −1.59 0.114 −0.06241 0.0067779
L3. −0.0433737 0.0176444 −2.46 0.016 −0.0783443 −0.0084031
L4. −0.032948 0.0124379 −2.65 0.009 −0.0575995 −0.0082965
Variable A 156.0121 404.1677 0.39 0.700 −645.0352 957.0594
–. −121.8526 65.70612 −1.85 0.066 −252.08 8.374784
L1. 7.945779 69.14039 0.11 0.909 −129.0882 144.9798
L2. 18.92311 65.26061 0.29 0.772 −110.4213 148.2675
L3. −22.64788 56.62374 −0.40 0.690 −134.8743 89.57853
L4. −1.608256 39.1689 −0.04 0.967 −79.23975 76.02324
Public spending on environmental protection % GDP 90.58914 477.001 0.19 0.850 −854.9096 1036.088
Public revenue from environmental pollution % GDP 820,791.9 441,361.6 1.86 0.066 −54,063.36 1,695,647
Variable B 808,383.1 436,916.4 1.85 0.067 −57,571 1,674,337
_cons 1544.626 143.4413 10.77 0.000 1260.33 1828.922
sigma_u 1810.6673
sigma_e 66.161496
rho 0.99866662 (fraction of variance due to
F F (23 109) = 169.13 Prob >

L1 - time delays corresponding to 1, meaning by one year; L2 - time delays corresponding to 2, meaning by two years; L3 - time delays corresponding to 3, meaning by
three years; L4 - time delays corresponding to 4, meaning by four years.
Source: Own compilation.

6
M. Postula and K. Radecka-Moroz Environmental Impact Assessment Review 84 (2020) 106435

Table 4
Fixed effect model of the impact of fiscal instruments on greenhouse gas emissions.
Greenhouse gas emissions Coef. Std. t P>t [95%] Conf.

Public spending on environmental protection

L1. −0.0014278 0.0011912 −1.20 0.233 −0.0037838 0.0009281
L2. −0.0005147 0.0013403 −0.38 0.702 −0.0031656 0.0021363
L3. −0.000998 0.0012711 −0.79 0.434 −0.0035121 0.0015161
L4. 0.0001231 0.0009192 0.13 0.894 −0.0016949 0.0019411
Variable A −64.50138 31.0844 −2.08 0.040 −125.9809 −3.021854

Public revenue from environmental pollution % GDP

L1. −1.867622 4.883349 −0.38 0.703 −11.52604 7.790792
L2. 1.10496 4.64851 0.24 0.812 −8.088983 10.2989
L3. 3.738207 4.155333 0.90 0.370 −4.480317 11.95673
L4. −4.761653 2.979511 −1.60 0.112 −10.65461 1.1313
Variable B 153,605.7 32,337.07 4.75 0.000 89,648.63 217,562.8
Public spending on environmental protection % GDP −84.60233 35.26804 −2.40 0.018 −154.3611 −14.84351
Public revenue from environmental pollution % GDP 157,637.7 32,458.69 4.86 0.000 93,435.68 221,839.7
_cons 91.26116 10.42964 8.75 0.000 70.63315 111.8892
lsigma_u 48.042956
sigma_e 5.2822276
rho 0.98805582 (fraction of variance due to
F u_i = 0: F(28 all = 103.14 Prob
134)

L1 - time delays corresponding to 1, meaning by one year; L2 - time delays corresponding to 2, meaning by two years; L3 - time delays corresponding to 3, meaning by
three years; L4 - time delays corresponding to 4, meaning by four years.
Source: Own compilation.

As regards NH3 emissions, the research revealed that public
spending has proved to be an inefficient tool in reducing them. The
main source of NH3 emissions is agriculture and until now, public po-
licies have failed to observe the expected level of reduction of ammonia.
Nitrogen management represents an integral means of reducing N
losses. Nitrogen management is based on the assumption that de-
creasing the nitrogen surplus (N surplus) and increasing the nitrogen
use effectiveness (NUE) contribute to lower NH3 emissions. Nitrogen
management is also meant to identify and prevent any exchange of
pollutants between various N compounds and environmental com-
partments. Creating an N input/output balance at an entity is a pre-
condition for integral optimisation of N management. In this case the
countries' growing engagement by way of public spending does not
allow for more effective results, which may come as a great surprise,
but that is what the analyses point to. The possible cause is that the
public spending is assigned in response to growing pollution and ad hoc
rather than preventive measures are undertaken in this respect. It may
be due to the choice of inefficient forms of support that do not yield the
expected outcomes or maybe one needs to wait for those outcomes
longer than the 5-year horizon. Public spending as a share of GDP has a
greater impact: in this case, its positive impact on NH3 reduction can be
observed, confirming our hypothesis.
Global CO emissions related to human activities are steadily redu-
cing in European Union countries, but the process is not progressing
equally in respective member states. The largest sources of emissions
for this pollutant are fossil fuel combustion at power plants, car and air
transport, and processes related to the manufacture of industrial goods.
The research conducted for the article showed that public spending
could be an efficient tool for authorities to reduce these emissions,
along with investment in biological projects absorbing CO from the
natural environment.
On the contrary, the effectiveness of tax instruments on reducing CO
emissions has proven to be low.
Contrary to the previous case, the level of CO2 pollution continues
to rise. As the research demonstrates, public spending is an effective
tool in reducing CO2 emissions, but again, taxes failed to have a positive
impact on mitigating them, confirming our hypothesis. The low effec-
tiveness of CO2 taxes could be partially explained by the fact that this
type of tax is still not very common in the EU, as most member states do
not have it.
Research has demonstrated that in general, in the area of environ-
mental protection, fiscal instruments do yield results but only after
several years, which is why decisions should be taken beyond the
partisan divide, by adopting the principle of their continued im-
plementation after change of power as only then can any results be
achieved. These results confirm our hypotheses. Moreover, political
commitment should be adapted to the wealth of relevant societies as in
poorer countries the government should accept a greater burden as
regards environmental action, making up for the lesser activity of its
citizens in this respect.
Overall, low effectiveness of environmental tax revenues might be
partially explained by the fact that their level is decreasing overall,
while the level of emissions for some key pollutants is increasing (e.g.
CO2 or NH3), suggesting that the taxes are not imposed consistently.
Additionally, pollution taxes represent only a small share of the total
environmental tax revenues and their distribution varies significantly
between member states. For example, pollution taxes imposed on
farmers (which is relevant for example for NH3 emissions) were gen-
erally very low, except for a few member states. It may suggest that the
“pollution pay principle” is not applied consistently and as a result is
not delivering the expected results.
The data indicating insufficient effectiveness of national spending
implementation and the position of the EU authorities, which, ever
since the first Environment Action Programme adopted in 1973, have
emphasised the international nature of environmental pollution, sug-
gest a need to take action at the international and intercontinental level
to protect the environment. Of course some people are sceptical of such
proposals, and only swear by the national dimension of such measures
but it's worth providing them with some examples of the recent years,
which very strongly suggest that such a direction does not bring results
in the long run. It would be useful to mention here one of the global
problems in the environmental protection that is air pollution. Despite
the noticeable improvement in air quality on a global scale, the efforts
undertaken by national authorities do not sufficiently protect our
health, and the problem of air pollution is especially acute for city
dwellers. Bad air quality is a phenomenon that ignores administrative
borders, as locally generated emissions of air pollutants may sig-
nificantly contribute to a concentration of those pollutants in another
area and that is why supra-national action is necessary to effectively
combat that threat. One must also stress the international dimension of

7
M. Postula and K. Radecka-Moroz
environmental policies with respect to ensuring competitive balance.
Only by adopting uniform principles and goals at the global level is it
possible to avoid distortion of competition resulting from the advantage
gained by an economy not subject to environmental protection goals or
fees. The best example in this respect would be the issue of limiting
pollutant emissions to the atmosphere. Should there be no harmonised
approach in place, major inequalities would arise in the competitive-
ness of economies e.g. higher prices of energy or production. In view of
the above, only a common approach to the issue, both at the EU and
global level, helps prevent respective economies from building their
competitive advantage on higher (not regulated by relevant standards
etc.) emissions of pollutants compared to other countries. Similarly for
production, respective entities that are subject to emission reduction
norms, standards and goals are obliged to incur costs of implementing
cutting-edge solutions and technologies to meet the requirements.
Competition of such entities with enterprises that are not subject to
those restrictions and requirements would not ensure equal treatment
and would result in losing the market due to higher operating costs.
Research has confirmed that “punishing” polluting entities by means of
a tax system has little impact on reducing such harmful activity in fu-
ture.
To emphasise the horizontal dimension of environmental policies
and the need to include them in a global context, it is also worth
mentioning here EU public opinion poll results. According to the latest
survey in 2017 60% of respondents were of the view that environ-
mental decisions need to be taken jointly at the EU level with 36% of
those polled being in favour of taking such decisions at a member state
level. Though such a result means that most respondents consider it
appropriate to solve environmental problems at the EU level, a drop in
that ratio since 2008 is worth noting. According to a 2008
Eurobarometer survey, the percentage of those indicating EU as the
suitable level for taking environmental action stood at 74% so in 9 years
it has fallen by 14% (European Commission, 2018). Such a situation
may stem from both lack of social awareness on measures taken at the
EU level and from new challenges being identified that are perceived by
the public as local problems. In the latter case, one can mention urban
pollution where the society believes local or national authorities to be
the appropriate entity to take action. Nevertheless, as pointed out
earlier, there being no global goals or standards defined also with re-
spect to problems occurring locally (noise, urban pollution), adequate
outcomes cannot be achieved. This means that it is necessary to take
measures to promote and increase social awareness of the scope and
principles of common environmental policy.
The above surveys show that, despite a certain decline in support for
taking environmental decisions at the EU level, a great majority of the
Community population consider environmental issues to be important
(Pereira and Pereira, 2017). At the same time, most respondents believe
that the EU should introduce Community-level regulations addressing
environmental protection issues in respective countries. This means
that the dimension of environmental policy is naturally understood and
identified as horizontal.
6. Conclusions
We wished to examine whether, and if so to what extent, the fiscal
measures taken by respective EU countries' authorities influence the
impact on environmental protection indicators. We assumed that in
order to improve the effectiveness of environmental protection mea-
sures, a policy mix should be adopted involving tools in both spending
and revenue. In order to test this hypothesis, we analysed the impact of
public spending and environmental taxes on the evolution of the se-
lected environmental indicators. We also observed the link between the
environmental protection measures and the living standard of the po-
pulation (measured with GDP per capita), namely by testing whether
the growing national wealth corresponds with an increase of public
spending on environmental expenditure, and reflects the level of
8
Environmental Impact Assessment Review 84 (2020) 106435
corresponding environmental taxes imposed, ultimately influencing the
level of environmental pollution.
The research result confirmed our hypotheses and revealed that
fiscal authorities need to take into account two main aspects when
taking decisions affecting the scale and structure of expenditure and
taxes intended to ensure environmental protection. Firstly, the specific
effect of the temporal dimension, and secondly the type of fiscal in-
struments to be used, otherwise the effectiveness of those measures risk
being greatly limited. As part of the policy mix, the possible tax in-
struments include tax reliefs for companies that invest in en-
vironmentally-friendly solutions, additional taxation of polluting com-
panies or non-refundable subsidies to support spending on
environmentally-friendly investment projects, public spending on en-
vironmental protection measures, interest rate subsidies for entities that
carry out environmentally-friendly investment projects or other mea-
sures. The research conducted revealed that it is necessary to create a
policy mix of environmental measures, adjusting the appropriate tools
to the type of environmental challenge, because when it comes to de-
cisions taken in that respect one should always consider the costs and
benefits translated into the standard of living measured through GDP
per capita. We are dealing with a phenomenon of a time lag between
fiscal decisions and their consequences for the improvement of in-
dicators that measure the scale of pollution – with respect to public
spending – and quite an interesting phenomenon of taxes having no
impact on decisions taken to limit the scale of environmental pollution
in the medium term. The second conclusion proves the limited effec-
tiveness of a “polluter pays principle”, suggesting that this tool is not
effective or applied rigorously enough and therefore, in the latter case,
the use of this type of instrument would only make sense if applied
consistently. The results indicating a positive long-term impact of
public spending advocates the necessity of boosting public spending for
environmental protection, preferably at supra-national level and in a
coordinated manner. General support from the citizens for undertaking
this type of efforts at the EU level may facilitate such a direction in
public spending. More research may be required at the national level to
investigate in detail what the most effective tools are, in terms of their
impact on the condition of the environment.
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