Chapter 4: Environmental Challenges and Effects Induced by the Shadow Economy

Purpose/Objective: The shadow economy problem comes from the need for governments to increase their revenues, while citizens expect better social protection schemes such as universal basic income, increased spending for social security, and better living standards, including a sustainable and green environment. Our study analyses a complex and multifaced relationship between the shadow economy and the environment.

Design/Methodology/Approach: The analysis refers to the shadow economy (% in GDP) and three environmental proxies (Agriculture Methane Emissions, Methane Emissions for the Energy Sector, and Tax on Pollution) for the EU countries over the 2009–2019 period. Firstly, we describe the evolution of the indicators, and then we observe the correlation between the indicators. The last stage considers simple linear regression models, with shadow economy as the independent variable and environmental proxies as dependent variables.

Significance/Implications/Conclusions: Our research found that the evolution of the shadow economy is on a downtrend, considering that the fight against corruption developed after the 2009 financial crisis and especially after the Euro crisis 2014. Countries such as Romania, Bulgaria, Italy, Portugal, and Spain have the highest shadow economy due to their political electorate’s constant mismanagement and low credibility. On the contrary, countries such as Hungary, Estonia, and Lithuania have a low shadow economy.

Limitations: The reliance on limited data and the models applied.

Future Research: Future studies could expand the analysis by incorporating additional indicators, considering other econometric models, and incorporating more comprehensive and up-to-date data.