Examining environmental instruments for green budgeting within the framework of the load capacity curve: Evidence from European Union countries

Significant global-scale environmental quality deteriorations are being experienced. These deteriorations have increased the importance of environmental financial instruments. With the green budgeting approach, various environmental tools are used at stages of revenue, expenditure, and investment to promote instruments that prioritize environmental quality. International agreements and treaties, along with the European Union (EU), have made the improvement of environmental quality a legal obligation. Various environmental instruments are widely used across EU countries to enhance green budgeting. This study examines the impact of environmental taxes, environmental protection expenditures, environmental technologies, and economic growth on the load capacity factor in EU countries for the period of 1995-2021 within the framework of the Load Capacity Curve (LCC). Initially, cross-sectional dependence tests were applied in the study, and based on the results of CDLMBP (Breusch and Pagan, 1980), CDLM, and CD (Pesaran, 2004) tests, the presence of cross-sectional dependence was detected in all variables and models. Subsequently, a homogeneity test was conducted since the tests to be applied in the following stages depend on whether the slope coefficients are homogeneous or heterogeneous. The test results indicated that the slope parameters are heterogeneous. Based on these findings, second-generation tests were applied in the study. The stationarity of the series was examined using the Breitung and Das unit root test, revealing that the series are stationary at the first differences for all countries. Later, the Durbin-Hausman panel cointegration test was applied to investigate long-term relationships. As long-term cointegration was found among the series, coefficient estimates for these relationships were calculated using the CCE long-term coefficient estimation test both on a country basis and for the entire panel. The findings showed that environmental taxes are significant for the entire panel and are the most effective tool in enhancing environmental quality. Furthermore, the Load Capacity Curve is valid for Luxembourg and Hungary, but not for other countries. Finally, policy recommendations were made based on the test results.