Asymmetric effect of environmental tax on CO2 emissions embodied in domestic final demand in South Africa: A NARDL approach

Motivated by the pressing need to address environmental concerns, this study explores the relationship between environmental taxes and CO2 emissions embodied in domestic final demand in South Africa. The study uses a non‐linear autoregressive distributed lag (NARDL) model to analyse the asymmetric impact of environmental taxes. Results indicate that environmental taxes have an asymmetric impact on CO2 emissions embodied in domestic final demand in both the short and long runs. Specifically, both positive and negative shifts in environmental taxes are linked with a respective 0.06% decrease and a more pronounced 0.22% decrease in CO2 emissions embodied in domestic final demand. Moreover, positive shocks in the GDP growth rate are associated with an approximately 0.002% uptick in CO2 emissions, while negative shocks lead to a 0.012% decrease. Additionally, both positive and negative shocks in population growth exhibit a significant positive correlation with the response variable. The baseline estimates demonstrate that the joint effect of environmental taxes and the GDP growth rate is correlated with reductions in CO2 emissions embodied in domestic final demand. Similarly, the joint influence of environmental taxes and population growth rate is linked to declines in CO2 emissions. The study highlights the practical policy implications of these findings.