This study investigates how environmental taxes contribute to reducing environmental degradation in the European Union (EU) from 1995 to 2023. Driven by increasing ecological pressures, such as rising ecological footprints (EFP), growing ecological deficits, and ongoing dependence on natural resources, the analysis explores whether environmental taxes serve as effective environmental policy tools or mainly as fiscal measures. The theoretical framework combines scale, substitution, and efficiency effects by including economic growth (GDP), renewable energy consumption (REC), energy efficiency (EE), and environmental taxes (ET). While ETs are expected to internalize environmental externalities, promote cleaner energy use, and lessen ecological burdens, prior research has yielded mixed results due to issues such as poor tax design, administrative limitations, and rebound effects, including the green paradox. Using EFP as the dependent variable, the study employs cluster analysis to account for structural differences among EU member states and estimates short- and long-term relationships through the Cross-Sectionally Augmented ARDL (CS-ARDL) method. The results indicate that, across the entire EU sample, ETs do not significantly affect EFP, whereas GDP tends to increase environmental pressure, and EE helps reduce it. Results specific to each cluster show that effects differ; ETs are ineffective in Cluster 1, worsen environmental degradation in Cluster 2, and significantly decrease EFP in Cluster 3. These findings highlight that the ecological impact of ETs depends heavily on a country’s context, including structural traits, policy quality, and energy sources. Overall, the study underscores the need for tailored environmental tax strategies within the EU to improve sustainability outcomes.