The effect of environmental taxation on carbon emissions in the East African Community

Abstract

Over the years, carbon dioxide emissions have become a global threat. It causes climate change, environmental degradation, pollution, and global warming. Rising temperatures, adverse health impacts, the loss of biodiversity, and extreme weather events, ranging from heavy rainfall to prolonged droughts, are among the visible consequences of unchecked carbon emissions. Rising carbon emissions not only affect ecosystems and human livelihoods but also undermine progress toward SDG 13 and SDG 3 in EAC. Several countries have implemented a range of policies, including introducing carbon taxes and promoting renewable energy, to curb emissions and accelerate the transition to a net-zero carbon emission world by 2050. However, the EAC countries have made limited progress in leveraging environmental taxation for carbon emission reduction. Moreover, existing environmental taxes act as a source of revenue for governments rather than tools to abate the adverse effects of climate change. While prior studies have investigated the relationship between environmental taxation and carbon emissions, this paper stresses that context-specific evidence was required to provide Policymakers with recommendations that work in EAC because “not one size fits all.” Additionally, there was a need to disaggregate total environmental taxes into specific categories: energy, transport, and pollution taxes, guiding policymakers to see which category should be given attention. The analysis was based on Uganda, Kenya, and Rwanda, and remains silent about other member countries due to the absence of data. The study covered a period running from 2001 to 2020. Static (FE and RE) and dynamic (FMOLS) panel data models were employed. The key findings indicated that pooled environmental taxes, energy, and pollution taxes reduce carbon emissions, while transport taxes had an insignificant effect. GDP per capita, technology, and population were found to increase carbon emissions. A unidirectional causality from environmental taxes to carbon emissions was found. Based on the findings, the East African region needs to increase the share of environmental taxes to increase their effectiveness. Instead of increasing transport taxes, countries need to redesign transport taxes. Strengthening environmental taxation in the EAC is not only vital to achieve EAC Vision 2050 of maintaining carbon emissions and temperatures below 5.1 metric tons and between 20°C and 30°C, respectively, but it is also critical for keeping EAC countries competitive in the European markets by meeting the standards of the Carbon Border Adjustment Mechanism.

Subject Keywords: Environmental taxation; Carbon emissions; East African Community