The Conditioning Role of Institutional Quality in Climate Policy Effectiveness: Evidence from Environmental Taxation, Green Innovation, and Trade Openness in the E7 Economies

Abstract

This study examines how institutional quality conditions the effectiveness of environmental taxation, green technology innovation, and trade openness in shaping CO2 emissions in the E7 economies during 2001-2023. The analysis applies a PMG-ARDL framework supported by cross-sectional-dependence diagnostics, second-generation unit-root tests, cointegration tests, marginal-effect analysis, and Dumitrescu-Hurlin panel causality tests. The results show a cautious and instrument-specific pattern. Renewable energy is the most consistent emission-reducing variable, while GDP per capita is consistently associated with higher emissions. Trade openness is negatively associated with long-run CO2 emissions, but its marginal effect weakens as institutional quality rises. Environmental taxation and green technology innovation do not show uniformly significant direct effects; GrnTI point estimates are negative across institutional-quality levels, but the marginal effects are not statistically significant. Institutional quality therefore acts as a conditioning factor rather than a universal amplifier of climate-policy effectiveness. The short-run results also indicate limited direct effects for several policy variables, while renewable energy and GDP show more immediate associations with emissions. Panel causality tests do not confirm statistically significant pairwise causal directions, so the findings are interpreted as conditional long-run associations rather than definitive causal effects. The results suggest that E7 climate policy should combine credible environmental-tax administration, innovation diffusion, environmentally aligned trade policy, and sustained renewable-energy expansion, while avoiding claims that institutional quality automatically strengthens every climate-policy instrument.