Incentives for sustainability in the European Union: Analysis of institutional factors, governance issues, and tax policy

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Sustainability and the debate over climate change have become hot topics in the literature and news. Global reactions to the mounting scientific evidence have evolved rapidly in recent years, as an increased sense of urgency has emerged. On September 27, 2013, the IPCC announced that there is a 95% probability that climate change has been caused by humans. This announcement, in conjunction with extreme weather events in recent years, has created even more urgency for policymakers to address climate change issues. Since the EU has been successful in decreasing its GHG emissions, its institutional factors, governance structure, and energy tax policies are examined. Institutional structures vary greatly between developed and developing countries, which may impact the “green-ness” of firms operating within those regions. Previous studies examine institutional factors in both developed and developing nations; however, the literature lacks sufficient research in the area of “green-specific” institutional factors. The “green-ness” of firms in developed versus developing countries is examined. The “greenness” of firms from EU-member nations are also compared to those based in both developed and developing countries. The Newsweek Green Index is tested for significance. Governance issues, specifically agency problems, are abundant in efforts to reduce global carbon emissions. Extensive research has been conducted related to firm-level governance; however, research is lacking in the area of agency issues inherent in global collaboration. Despite the EU’s multilateral governance structure, the EU was one of the few Kyoto members to reach its emissions reduction target for the period ended 2012; however, this could be offset by the inaction of developing countries. Since the EU “green” policies have focused on energy-related emissions, Eurostat’s emission data relative to developing countries (excluding deforestation) is tested. Tax policy is one of many methods which countries can use to reduce GHG emissions. Previous studies have focused on cap and trade as well as international tax competition; however, the literature lacks sufficient research on the effectiveness of the EU’s energy tax policies. This section examines the effectiveness of the 2003 EU Energy Taxation Directive in encouraging “green” activities. Eurostat’s “implicit tax rate on energy” is tested for significance. (Author abstract)