Rule of law and its implications for the environmental taxation-income path across European Countries

Research has clearly demonstrated that economic development is closely related to environmental quality. In last two decades this relationship has been described by the Environmental Kuznets Curve, that postulates an inverse U-shaped relationship between pollution and income. However, while theoretical and empirical research has focused on the polluting effects of economic development, few have identified the policy instruments which can be introduced to counteract such negative effects. This paper concentrates on one of these instruments, such as environmental taxation. Estimations of data from 28 European countries confirm the existence of an inverse U-shaped relationship between environmental taxation and per capita income, that we denominate Environmental Taxation Kuznets Curve (ETKC). The empirical results clearly demonstrate that the environmental taxation-income relationship is strongly influenced by the rule of law which, when strong, ensures that environmental policies are implemented effectively. A strong rule of law thus contributes to achieving a turning point at lower levels of per capita income. Our analysis also made it possible to identify differences in ETKC among European countries, showing that post-transition economies may have not yet reached the turning point of the curve due to the presence of a weaker rule of law.