Abstract
<jats:p>This study examines the determinants of carbon dioxide (CO2) emissions across 25 European Union countries over the period 2000–2021, with particular emphasis on the roles of environmental taxation and green innovation in shaping environmental sustainability. The analysis is grounded in ecological modernization theory, endogenous growth theory, and the Environmental Kuznets Curve hypothesis, which collectively explain the long-run and dynamic interactions between environmental policy, economic activity, structural transformation, and environmental outcomes. To ensure robust empirical inference, this study applies a comprehensive econometric framework that accounts for cross-sectional dependence, heterogeneity, non-stationarity, cointegration, and endogeneity. The empirical strategy begins with Pesaran cross-sectional dependence tests and slope heterogeneity diagnostics, followed by second-generation panel unit root tests (Pesaran CADF/CIPS) and Westerlund cointegration tests to establish the existence of long-run equilibrium relationships among the variables. Long-run coefficients are estimated using Fully Modified Ordinary Least Squares (FMOLS), Dynamic Ordinary Least Squares (DOLS), Canonical Cointegrating Regression (CCR), and Common Correlated Effects Mean Group (CCEMG) estimators. In addition, the Panel Autoregressive Distributed Lag (ARDL) model is employed to capture both short-run dynamics and long-run adjustment processes, while the System Generalized Method of Moments (System GMM) estimator addresses potential endogeneity, reverse causality, omitted variable bias, and dynamic persistence in CO2 emissions. The empirical results indicate that environmental taxation has a positive and statistically significant association with CO2 emissions, suggesting that current fiscal environmental policies in EU-25 countries may not yet be sufficiently effective in discouraging pollution-intensive activities. In contrast, green innovation is found to significantly reduce CO2 emissions, underscoring the critical role of innovation-driven environmental investment and technological progress in improving environmental quality. Economic growth, exports, and urbanization are associated with higher emissions, while imports contribute to emission reductions, reflecting differences between domestic production-based effects and trade-related structural adjustments. The System GMM results further confirm the persistence of CO2 emissions over time and validate the robustness of the long-run relationships identified by alternative estimators. Likewise, the CCEMG and Panel ARDL results support the stability and consistency of the findings under conditions of cross-sectional dependence and heterogeneous country dynamics. Taken together, the results highlight the importance of integrating environmental taxation with green innovation policies, innovation-driven investment, and sustainable trade policies to achieve long-term emission reductions in the European Union. This study contributes to the environmental economics literature by providing robust empirical evidence using second-generation panel econometric techniques that explicitly address cross-sectional dependence, heterogeneity, and endogeneity in the analysis of environmental sustainability.</jats:p>