Do Environmental Taxes Stimulate Eco-Investments? Evidence from Seven EU Member States and the EU-27

The European Green Deal places environmental taxation at the centre of decarbonisation policies. Nevertheless, the empirical evidence for its effectiveness as an incentive for capital eco-investments remains limited, particularly at the sectoral level. The present study analyses this relationship through a country-sector panel of seven EU member states and four sectors under NACE Rev.2 for the period 2014-2023. A five-step empirical strategy is employed, comprising: descriptive statistics, correlation analysis with relative indicators, fixed-effects panel regressions, the Granger causality test, and robustness checks. The results demonstrate a clear scale effect - the correlation between the absolute values of environmental taxes and eco-investments is very high, yet following normalisation against the scale of the economy it becomes practically zero and statistically insignificant. The panel regressions likewise establish no statistically significant relationship, and the Granger test does not confirm causality in either direction. The robustness checks confirm this finding. On this basis, the study concludes that environmental taxation in isolation does not stimulate sectoral eco-investments and functions rather as a fiscal instrument without a discernible investment effect. The findings suggest the need for a policy rethink through more targeted revenue use, sectoral differentiation, and the combining of tax instruments with non-fiscal mechanisms for more effective management of transition financial risk.