Gas taxes stop working once a country gets rich enough—eventually, people just keep polluting no matter the cost.
SSRN · March 18, 2026 · 6434927
The Takeaway
Economists generally view carbon taxes as the most efficient tool for climate policy. This study finds a 'law of diminishing returns' where, once a country hits a certain level of wealth and innovation, the tax loses its power to change behavior, suggesting that rich nations cannot rely on taxation alone to reach net zero.
From the abstract
This study investigates the conditional effects of fossil fuel-related taxes on CO2 emissions by the moderating roles of GDP per capita and energy-related green innovation, specifically testing the hypothesis of diminishing returns in OECD fixed panel analysis. After validating the environmental Kuznets curve, it reveals that the mitigation effect of fossil fuel taxes exhibits diminishing marginal returns. Additionally, higher GDP per capita significantly erodes the carbon-reducing efficacy of t