Threshold effects of environmental tax on climate vulnerability

An environmental tax promotes economic sustainability and boosts tax revenue, but decreases national welfare due to the tax multiplier effect, affecting government spending on climate vulnerability reduction. This implies a complex relationship between environmental tax and climate vulnerability. We examine how environmental tax influences climate vulnerability by focusing on its threshold effects that are dependent on government expenditure. Using a dual-threshold model, fixed-effect threshold generalized method of moments estimator, and balanced panel data from 31 countries for 2001–2018, we consistently find direct (transforming) and indirect (threshold) effects of environmental tax. Specifically, the threshold effects show that, contingent on government expenditure, the impact of environmental tax is greater at low or high levels than at medium levels. Furthermore, carbon emissions increase climate vulnerability, whereas GDP and manufacturing development decrease it. This study underscores the necessity for customized environmental tax policies to optimize government spending and effectively reduce climate vulnerability.