Do strict environmental policies in European countries reduce CO2 emissions?

Abstract

This article uses fixed-effects and random-effects panel data models to examine the effectiveness of environmental policies, and additional determinants on carbon dioxide (CO2) emissions in 21 selected European OECD countries from 1990 to 2020. Specifically, the analysis investigates the impact of individual subgroups constituting the total Environmental Policy Stringency (EPS) index, namely market-based instruments, non-market-based instruments and technological support. Furthermore, the impact of these instruments is examined considering two types of CO2 measurements: production-based (PBA) and consumption-based (CBA). The obtained results demonstrate that the impact of each subgroup varies and the strength of their influence depends on the method of CO2 measurement. Finally, the study examines whether the 2008 changes to the Emissions Trading System (ETS) influenced the effectiveness of the instruments within the EPS. The results indicate that these changes significantly improved policy effectiveness when CO2 is measured using the PBA. In contrast, the post-2008 changes had a minimal effect on reducing CO2 emissions measured using the CBA, which may be related to the phenomenon of outsourcing.