Environmental Taxation and Ecological Sustainability in Southern African Economies: Do Sin Taxes Matter?

2.1 Literature review

Based on Pigouvian principles, environmental taxation is seen as a means of internalizing the adverse externalities of environmental destruction by imposing taxes equal to the social cost of pollution. The strategy is used to encourage polluters to reduce emissions and adopt cleaner technologies [12]. According to the double dividend hypothesis, environmental taxes would not only improve environmental quality but also generate revenues that can be used to offset other distortionary taxes, thereby increasing overall economic efficiency [13-15]. In its simplest sense, environmental taxation based on Pigouvian theory holds that undesirable externalities, such as emissions, can be addressed by imposing a tax on the activity that causes them, thereby internalizing social costs into individual decisions [16, 17]. Pigouvian environmental taxes (e.g., a carbon tax) are intended to realign economic incentives toward lower-emission behaviour, thereby improving long-term ecological well-being within an ecological sustainability context [18-20]. Nonetheless, the application of Pigovian prescriptions into useful policy in developing or emerging economies raises issues of institutional competence, equity, political economy, and revenue utilization, all of which moderate the effectiveness of such taxes [21, 22]. In fact, this complexity is depicted in recent empirical studies in Southern Africa, with the implementation of environmental taxation largely concentrated in South Africa in the southern region, hence most of the empirical literature has emanated from South Africa.

Over the years, environmental and carbon taxation in Southern Africa have received increased empirical investigation. Although South Africa remains the dominant empirical case (with its established carbon tax), recent studies explore more deeply the interactions among taxation, income distribution, institutional quality, innovation, and environmental outcomes [23]. A thorough political economy analysis of the Carbon Tax Act of 2019 in South Africa [20] adds that the tax corresponds to the Pigouvian rationale, but its practical design is rather compromised. They are generous tax-free allowances, offset mechanisms, and phased implementation, all negotiated to control industrial, equity, and political pressures. Baker [24] empirically examined the Carbon Tax as a climate intervention in South Africa, positing that the rhetorical presentation of the tax as Pigouvian, and its actual implementation, which dilutes the amount of the tax, the allowances, and the business lobby in the context of the tax, undermines part of its intended effectiveness on the environment. Thus, carbon taxes might be cost-effective for cleaning up, but provide little certainty about short-term emissions, which raises concerns about policy credibility and commitment. Accordingly, the implementation of the carbon tax can be viewed as a trade-off among economic, political, and social objectives, which could undermine its purity as an internalization mechanism, despite its justification on Pigovian grounds.

Bohlmann et al. [25] used a static Computable General Equilibrium (CGE) model, observed that even though a carbon tax can mitigate emissions, it also lowers Gross Domestic Product (GDP) and household consumption (particularly in energy-intensive sectors). They indicate that a modest starting carbon tax can lead to a more agreeable trade-off. These distributional studies show that there is a central tension in the practice of Pigouvian taxes as they should be applied to impose costs on polluters, but unless they are set with care and there are robust recycling systems, they may actually produce retrogressive or distorting outcomes. Recent empirical research suggests that institutional quality is crucial for the efficient implementation of market-based environmental policy tools. It turns out that better quality of governance and regulation significantly contributes to the efficiency of emission reduction via tools such as carbon taxes, even in emerging economies [26, 27]. On the other hand, the environmental effect of financial development appears heterogeneous and non-linear, suggesting that financial maturity tends to exert a greater emission-enhancing effect at lower levels [28]. Green innovation, however, has been shown to reduce emissions, especially when effective institutions are in place [29, 30]. These macro-level analyses demonstrate how the Pigovian theory of tax logic might work in theory, the channel between tax revenue to actual emissions reduction is mediated by other structural variables such as institutional capacity, financial market and energy dependency.

Although Southern African empirical research is somewhat limited, some cross-African studies provide useful insights. These studies highlight that environmental taxation cannot work in isolation, with the implication that its success would be conditional on the presence of innovative ecosystems, governance systems, and macroeconomic stability [5, 31-33]. Ndlovu [34] examined the welfare and price effects of South Africa’s carbon tax on building materials using input-output analysis and household survey data. Results show that energy and emission-intensive materials, such as metals, are more price-sensitive than cement or wood, while electricity costs dominate household construction expenses. Low-income households bear a disproportionate burden, and the effects of revenue recycling are limited, though targeted energy subsidies could improve equity and policy effectiveness. Evan et al. [35] concentrated on the corporate sector, analyzing the list of cement and mining companies of Johannesburg Stock Exchange in 2016-2020 using correlational analysis to establish a negative relationship between the burden of the carbon tax and the net profit margin, with Udeagha and Breitenbach [36] corroborating their assertion stating that the financial sustainability of firms is negatively influenced by the tax. An Environmental Kuznets Curve (EKC) study [37] examines whether fiscal decentralization enhances ecological quality in South Africa. They discover that higher decentralization allows local governments to control environmental activities (polluting) in a better way and enhance the environmental performance in the long and short term. While examining the application of Markov-switching rolling-window regression to determine the sensitivity of CO2 emissions to business-cycle phases in post-apartheid South Africa, it is posited that the nonlinear nature of emissions in response to economic shocks implies that environmental tax policy needs to be resistant to macroeconomic shocks [38].

As mentioned, Green financial technology and institutional quality are the most crucial levers, as shown by Wali et al. [39]. They can be used together to trigger sustainable development, since without them, a Pigouvian tax may be inadequate. In a study of 20 African countries, Martínez-Zarzoso and Maruotti [40] examined 1975-2003 data for developing countries and showed that urbanization significantly influences CO₂ emissions in a nonlinear manner. Their findings reveal an inverted U-shaped relationship, where emissions initially rise with urbanization but decline after reaching threshold levels in some country groups. The study further demonstrates heterogeneous effects across clusters, with urbanization becoming environmentally beneficial at higher development stages, while in other groups, only income and population drive emissions. Mpofu [5] critically reviewed opportunities and challenges of green taxes in African countries and found that such taxes have been rising in prominence (ex, fuel taxes, plastic levies), but they are not fully implemented due to political economy, inequality, and the absence of alternatives to polluting activities. Cross-country fully modified ordinary least squares (FMOLS), DOLS, and IV-generalized method of moments (GMM) analyses of 23 sub-Saharan African nations show that financial inclusion, though economically effective, will increase CO2 emissions unless it is offset by renewable energy [41]. These broader African conclusions point to the systemic constraints that also underpin Southern Africa's income inequality, institutional deficiencies, and reliance on fossil-intensive infrastructure to provide pure Pigovian taxation, which requires buttressing with a robust system of governance, financial systems, and innovation capabilities to achieve actual ecological sustainability.

2.2 Theoretical framework

The Pigovian tax scheme, grounded in Pigou’s [12] seminal work, provides the theoretical foundation for environmental taxation in Southern African Development Community (SADC) economies. Pigou argued that where production or consumption imposes unpriced social costs (e.g., pollution), a corrective tax equal to the marginal external cost should be imposed to restore optimal resource allocation. Market failures in environmental management, arising from externalities not captured in conventional economic transactions, justify such market-corrective action.

This study further draws on the EKC hypothesis [42, 43], which posits initial environmental deterioration followed by recovery after reaching a sufficient income level. Well-designed environmental taxes can accelerate a nation’s transition on this curve by deterring polluting activities and promoting green development. Ecological modernization theory [44] posits that environmental protection and economic development are mutually reinforcing through institutional innovation and policy reform. Finally, club convergence theory [45-47] suggests that nations with similar structural and institutional characteristics may converge to common environmental outcomes under coherent policies. Collectively, these frameworks explain how Pigovian taxation may drive convergence toward ecological sustainability within the SADC economic bloc.

The actual carbon price, in the form of environmental taxes, appears to be significantly diluted by policy design features such as tax-free quotas, industry-specific exemptions, and the overuse of carbon credits [2, 23]. These provisions reduce the marginal cost of emissions for significant polluters, undermining the incentive to adopt cleaner technologies. In that setting, environmental taxes should serve not as corrective measures but as nominal fiscal measures with minimal behavioural influence. The design of fuel levies in most SADC economies does not directly provide incentives to replace or increase energy efficiency [11]. Fuel taxes are frequently imposed across all sectors without distinction for carbon intensity or technological substitutes. Consequently, companies can treat these taxes as ordinary input costs rather than an indication that they need to reorganize their production. Without viable and affordable renewable energy sources, producers will either pass higher costs on to consumers or absorb them, without changing their emission profile. This cost-pass-through effect also underpins the persistence of emissions despite higher taxation. The lack of complementary environmental policies can significantly undermine the effectiveness of taxation. The effectiveness of environmental taxes is seldom done in isolation, and the policy mix that requires renewable energy subsidies, emissions trading systems, and enforceable regulatory standards is the one that should be in place. The results imply that either weak or nonexistent complementary mechanisms exist in the context studied. Therefore, possible recycling of tax revenues may occur through political economy channels that are biased toward incumbent industries, which are usually carbon intensive [51]. This inefficient allocation of environmental tax revenue is equivalent to nullifying any planned environmental good and may even worsen emissions through indirect subsidies or infrastructure assistance to polluting industries.

The positive, significant coefficient for regulatory quality further complicates the analysis. Traditionally, the quality of regulations is also expected to improve environmental performance by increasing policy implementation and institutional performance. The findings, however, point in a different direction: the quality of regulation is related to higher emissions (OLS: 1.125; FMOLS: 1.737). This implies that even when regulatory capacity is enhanced in the absence of clear environmental requirements, such improvement can simply enable industrial development rather than protection. In this respect, stronger institutions seem to lower transaction costs, improve investment climates, and promote economic activity, much of which remains carbon-intensive. This explanation aligns with the upward-sloping part of the EKC, in which economic growth and institutional development initially lead to environmental degradation before subsequent improvement can occur [29]. The high value of the FMOLS estimate (1.737) supports the idea that this effect is long-run in nature and, therefore, that, in the absence of a structural change towards green regulation, improved regulatory quality may still support emissions-intensive growth trajectories.

The contribution of FDI across all specifications is significantly neutral, with coefficients that are statistically non-significant. This observation provides no empirical evidence for either the pollution haven hypothesis, which states that FDI transfers cleaner technologies and practices to the host country, or the pollution halo hypothesis, which argues that FDI brings cleaner technologies and practices to the host country. Rather, these findings are consistent with a growing body of literature that argues the environmental impact of FDI is context-specific and, in many cases, mediated through domestic policy frameworks [55]. Without strong environmental laws or incentives to invest in green, FDI can easily reflect the host country's current production structure, with a negligible net impact on emissions.

The population dynamics also indicate significant heterogeneity over time. In the short run, population growth is negatively associated with per capita emissions, which may be attributed to scale effects; larger population increases are associated with lower per capita emissions. Nevertheless, this correlation turns negative in the long term, as evidenced by the FMOLS coefficient of 0.115 (p < 0.001). This aligns with the theory of demographic transition, which holds that, in the long run, population growth leads to greater urbanization, industrialization, and energy consumption. As economies develop, income growth and changing consumption patterns increase energy use and, in turn, per capita emissions.

The DK corrected 2SLS estimates provide more reliable inference because they account for cross-sectional dependence, heteroskedasticity, and serial correlation, which are common in multi-country panel studies. The findings indicate that environmental taxation has a positive, statistically significant impact on CO₂ emissions in both fixed- and random-effects specifications, suggesting that environmental taxation may be inefficient in its design or implementation. Conversely, the FDI variable is statistically insignificant when cross-sectional dependence is accounted for, suggesting that the previous results from traditional estimators might be biased. It is interesting to note that the quality of regulatory frameworks has a strong negative impact on emissions under DK correction, thereby nullifying the misleading positive relationship between regulatory quality and emissions under DK correction. The population size continues to show a significant negative relationship with emissions, further validating the stability of this relationship. In general, the results indicate that neglecting cross-sectional dependence may lead to erroneous inferences, especially regarding the roles of institutional quality and FDI in this context.

Collectively, these findings cast doubt on the belief that environmental taxation is inherently effective in reducing emissions, especially in developing regional blocs like SADC. The findings highlight the importance of policy design, institutional alignment, and complementary measures in determining the environmental efficacy of fiscal instruments. Unless structural deficiencies, such as poor tax design, the absence of renewable alternatives, and misaligned regulatory incentives, are addressed, environmental taxes may not achieve their intended effects and may even lead to perverse outcomes in the long term. Policy-wise, the implications are evident. Environmental taxation must be integrated into a consistent, holistic climate policy framework. This involves abolishing exemptions that weaken the carbon price signal, introducing targeted subsidies to encourage clean energy adoption, and increasing regulatory requirements that clearly prioritize environmental outcomes. Furthermore, political capture and ensuring that funds are channelled towards sustainable investments depend heavily on transparency and accountability in the utilization of tax revenues. To summarize, the empirical evidence shows the essential lack of connection between environmental tax policy and environmental outcomes in the context of the study. Instead of being effective tools for decarbonization, environmental taxes seem to be operating within institutional and structural constraints that curtail their effectiveness. These limitations have been the focus of efforts to align fiscal policy with climate targets and to achieve significant long-term emission cuts.