Environmental consequences of revenue and income taxation, foreign debt and FDI: time-varying causality and interrelationships

Abstract

Purpose The mobilization of financial resources through taxation, investment and external debt is essential for achieving sustainable development. This study fills the gap in understanding the dynamic linkages between taxation, external finance, investment and carbon footprint in developing countries. Previous research has mainly focused on carbon-specific taxes and static models. In contrast, this study examines how tax policies beyond carbon taxes (revenue and income taxation) affect not only emissions but also external debt and foreign direct investment (FDI), which in turn affect environmental outcomes. Design/methodology/approach A time-varying vector autoregression model in R is used with Moroccan data (1990–2022) to capture these evolving relationships. Findings The results show a significant time-varying Granger causality between fiscal policy, debt, FDI and carbon dioxide (CO2). The time-varying impulse response function shows that shocks in fiscal policy have inverse and time-varying effects on CO2, foreign debt and FDI. Practical implications Key findings include that a 1% increase in tax revenues reduces per capita emissions by 0.0047 to 0.0023 tons, while higher income taxes increase emissions by 0.01–0.021 tons, which is particularly important for developing countries with large populations. Each additional ton of CO2 correlates with a $9.06 billion increase in foreign debt. Income taxation reduces FDI by about 50 million dollars. FDI initially increases with emissions, but decreases once a certain threshold is exceeded. Originality/value This study illustrates the dynamic interplay of environmental economic theories and highlights the need for adaptable, timely tax strategies. It provides insights into the integration of tax policy into climate adaptation plans. It emphasizes the role of adaptive taxation in strengthening climate resilience and sustainable investment, especially in vulnerable developing countries.