Public Debt as a Moderator of the Environmental Tax-Economic Growth Nexus: Evidence from EU-27 Member States

<jats:p>Environmental taxation is an important instrument in the transition to a low-carbon economy, yet empirical findings on its relationship with economic growth remain inconclusive. This study examines whether public debt moderates the relationship between environmental tax revenue and real GDP growth in the EU-27. It uses a balanced panel of 297 observations covering 2014–2024. The baseline specification is a two-way fixed-effects model with Driscoll–Kraay standard errors, supplemented by marginal-effects analysis and robustness checks. At the mean level of the other interacting variable, neither environmental tax revenue nor public debt exhibits a statistically significant conditional association with economic growth. However, the interaction coefficient is negative and statistically significant, indicating that the estimated relationship between environmental tax revenue and growth becomes less favourable as public debt increases. The marginal effect is positive and statistically significant at low debt levels, statistically insignificant at the mean debt level, and negative but statistically insignificant at high debt levels. Robustness checks preserve the negative sign of the interaction, although its statistical significance depends on the covariance estimator used. The findings indicate that fiscal conditions matter for the environmental taxation–growth relationship, but they do not establish a causal effect or a universal debt threshold.</jats:p>