Synergistic effects of green finance and environmental taxation on consumption-based carbon emissions in developed economies

This study investigates how green finance (GF) and environmental taxes (ERT) provide synergistic impact in reducing consumption-based carbon emissions (CBE) in 17 developed economies over a period from 1995 to 2024 when concerns for environmental sustainability are being accorded highest priority across the globe. The choice of CBE is more scientific, which is a comprehensive metric for measuring global environmental deterioration vis-a-vis production-based measures. Based on established underlying theoretical framework, the study employs two-way fixed effects with Driscoll-Kraay standard errors, system GMM, and method-of-moments quantile regression to address concerns for cross-sectional dependence, heterogeneity, and endogeneity. The empirical findings reveal that both GF and ERT help in CBE mitigation, while their interaction effect offers significant synergistic effects as GF relaxes capital constraints, enables entities to effectively respond to ERT levies and achieve real emission reductions rather than offshoring them. The interaction gets strengthened through renewable energy consumption and embodied carbon trade channels. The results are uniform and robust under various model specifications, levels of CBE, and choice of econometric techniques. The novel findings on GF-ERT synergy enhance the existing knowledge and offers actionable policy insights for formulating integrated environment control regulations for achieving environmental sustainability. • Green finance (GF) and environmental taxes (ERT) individually reduce consumption-based carbon emissions (CBE) in developed economies. • Synergistic GF-ERT interaction prevents carbon leakage by enabling effective responses to tax price signals. • CBE metric superior to production-based emissions, capturing trade-embodied global climate responsibility. • Advanced econometrics (fixed effects, SGMM, MMQR) confirm policy complementarities via renewable energy and trade channels.