Carbon emissions reduction and tax evasion behaviour: a trade-off between environmental goals and economic feasibility

Purpose This paper aims to examine the impact of carbon emissions (carbon dioxide [CO2]) reduction on tax evasion behaviour. Design/methodology/approach This study uses data from 200 countries from 2000 to 2017. The empirical analysis is based on various methodological tools, including ordinary least-squares model, fixed- and random-effects models. In addition, GMM and linear mixed model has been used for robustness purposes. Findings The results show that carbon emissions reduction significantly affects tax evasion behaviour; when carbon emissions decrease, tax evasion behaviour increases. This indicates that the reduction of CO2 emissions is linked to significant costs, placing a financial burden on companies and leading them to evade taxes to counterbalance these costs. Practical implications This study has important implications, as it highlights that the efforts made by countries to minimize CO2 emissions are associated with high costs and may lead to increased tax evasion, potentially contributing to countries’ budget deficits. The results provide valuable insights for policymakers and stakeholders to implement effective environmental and fiscal regulations that contribute to a sustainable and eco-friendly future. These regulations can help maintain a balance between improving economic growth and ensuring the protection of the environment. Originality/value To the best of the authors’ knowledge, this is the first paper to test the impact of carbon emissions on tax evasion using macro-level data.