Do environmental taxes corrupt governments?

In this study, we examine the effects of four environmental taxes (taxes on carbon, energy, resources, and transport) on two indices of anti-corruption (the Control of Corruption Index [CC] and the Corruption Perceptions Index [CPI]) and a third index, the Political Corruption Index (PCI), shedding light on the question whether the implementation of environmental taxes leads to more government corruption. Our hypothesis is that firms that are affected by environmental taxes may compensate for or evade the loss of revenue through some corrupt practices and behaviors. We conduct a rich empirical analysis for a global sample of 111 countries and two subsamples (45 high-income countries and 66 low- and middle-income countries) from 2002 to 2020. Most environmental taxes have significant positive effects on CC and CPI, while they have negative effects on PCI, implying that environmental taxes appear to increase anti-corruption indices. We also discuss the possible channels for the effects of environmental taxes on corruption: general government expenditure, and taxes on income, profits, and capital gains. Accordingly, we uncover a plethora of interesting findings that are robust to multiple secondary tests. •We study the effect of environmental taxes (i.e., taxes on carbon, energy/resources/transport) on anti-corruption.•We examine the impact on 3 indexes: Corruption Perception, Control of Corruption, and Political Corruption.•Most environmental taxes have significant positive effects on Corruption Perception and Control of Corruption.•Most environmental taxes have negative effects on Political Corruption.•The results imply that environmental taxes induce anti-corruption.