Does the Quality of Political Institutions Matter for the Effectiveness of Environmental Taxes? An Empirical Analysis on CO2 Emissions

Focusing on a sample of 39 countries in the period 1996–2017, we analyze whether the relationship between environmental taxes and CO2 emissions depends on the quality of political institutions. Our results show that an increase in the environmental tax revenue is related to a reduction in CO2 emissions only in countries with more consolidated democratic institutions, higher civil society participation, and less corrupt governments. Moreover, the relationship between CO2 emissions and revenue neutral shifts to different tax sources depends not only on the quality of political institutions, but also on the kind of externality the policymaker aims at correcting.