Eco-Taxation and Financial Development: Catalyst for Green Innovation and Environmental Sustainability in the EU

The effectiveness of eco-taxation in driving green innovation and sustainability in the European Union (EU) remains a contested issue, with critics arguing that it may burden businesses and compromise competitiveness. This study examines how eco-taxation and financial development interact to influence green innovation and environmental sustainability across EU member states, while accounting for the moderating effect of economic growth. Panel data spanning 2010 to 2022 is used, and the System Generalised Method of Moments (GMM) estimator is employed to tackle endogeneity and dynamic relationships. The findings reveal that eco-taxation significantly promotes green innovation, especially in financially developed economies. Moreover, economic growth supports sustainability when aligned with robust environmental policies, but may lead to resource stress in their absence. By situating the findings within the framework of the United Nations Sustainable Development Goals (SDGs), the study contributes to SDG 7 (Affordable and Clean Energy), SDG 8 (Decent Work and Economic Growth), SDG 9 (Industry, Innovation and Infrastructure), SDG 12 (Responsible Consumption and Production), SDG 13 (Climate Action), and SDG 17 (Partnerships for the Goals). Specifically, it advocates for integrated policy frameworks that align eco-taxation with green finance (SDG 8 & 9), innovation strategies (SDG 9), sustainable production and resource efficiency (SDG 12), and climate resilience (SDG 13). Furthermore, it underscores the role of targeted R&D investments, enhanced financial instruments, and strengthened public–private partnerships (SDG 17) in supporting the EU's green transition while preserving economic resilience.