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Carbon pricing and the elasticity of CO2 emissions

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  • Rafaty, R.
  • Dolphin, G.
  • Pretis, F.

Abstract

We study the impact of carbon pricing on CO2emissions across five sectors for a panel of 39 countries over 1990-2016. Using newly constructed sector-level carbon price data, we implement a novel approach to estimate the changes in CO2emissions associated with (i) the introduction of carbon pricing regardless of the price level; (ii) the implementation effect as a function of the price level; and (iii) post-implementation marginal changes in the CO2price.We find that the introduction of carbon pricing has reduced growth in CO2emissions by 1% to 2.5% on average relative to counterfactual emissions, with most abatement occurring in the electricity and heat sector. Exploiting variation in carbon pricing to explain heterogeneity in treatment effects, we find an imprecisely estimated semi-elasticity of a 0.05% reduction in emissions growth per average $1/metric ton (hereafter abbreviated as: ton) of CO2.After the carbon price has been implemented, each marginal price increase of $1/tCO2 has temporarily lowered the growth rate of CO2emissions by around 0.01%. These are disappointingly small effects. Simulating potential future emissions reductions in response to carbon price paths, we conclude that –in the absence of complementary non-pricing policy interventions – carbon pricing alone, even if implemented globally, is unlikely to be sufficient to achieve emission reductions consistent with the Paris climate agreement.

Suggested Citation

  • Rafaty, R. & Dolphin, G. & Pretis, F., 2020. "Carbon pricing and the elasticity of CO2 emissions," Cambridge Working Papers in Economics 20116, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:20116
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    1. > Environmental and Natural Resource Economics > Climate economics > Ex-post evaluation of climate policy > Carbon taxes

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    2. Leroutier, Marion, 2022. "Carbon pricing and power sector decarbonization: Evidence from the UK," Journal of Environmental Economics and Management, Elsevier, vol. 111(C).
    3. Torben K. Mideksa, 2021. "Pricing for a Cooler Planet: An Empirical Analysis of the Effect of Taxing Carbon," CESifo Working Paper Series 9172, CESifo.
    4. Maximilian Konradt & Beatrice Weder di Mauro, 2021. "Carbon Taxation and Greenflation- Evidence from Europe and Canada," IHEID Working Papers 17-2021, Economics Section, The Graduate Institute of International Studies, revised 25 Dec 2022.
    5. Emanuel Kohlscheen & Richhild Moessner & Elod Takáts, 2021. "Effects of Carbon Pricing and Other Climate Policies on CO2 Emissions," CESifo Working Paper Series 9347, CESifo.
    6. Felix Pretis, 2022. "Does a Carbon Tax Reduce CO2 Emissions? Evidence from British Columbia," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 83(1), pages 115-144, September.
    7. Kramer, Niklas & Lessmann, Christian, 2023. "The Effects of Carbon Trading: Evidence from California’s ETS," MPRA Paper 116796, University Library of Munich, Germany.
    8. Richard S. J. Tol, 2023. "Costs And Benefits Of The Paris Climate Targets," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 14(04), pages 1-18, November.
    9. Srivastav, Sugandha & Zaehringer, Michael, 2023. "The Economics of Coal Phaseouts," INET Oxford Working Papers 2023-17, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.
    10. Wan, Tong & Tao, Yuechuan & Qiu, Jing & Lai, Shuying, 2023. "Internet data centers participating in electricity network transition considering carbon-oriented demand response," Applied Energy, Elsevier, vol. 329(C).
    11. Anderson, Heather M. & Gao, Jiti & Turnip, Guido & Vahid, Farshid & Wei, Wei, 2023. "Estimating the effect of an EU-ETS type scheme in Australia using a synthetic treatment approach," Energy Economics, Elsevier, vol. 125(C).
    12. Xiyu Jiao & Felix Pretis, 2022. "Testing the Presence of Outliers in Regression Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(6), pages 1452-1484, December.
    13. Sandro Heiniger, 2024. "Data-driven model selection within the matrix completion method for causal panel data models," Papers 2402.01069, arXiv.org.

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    More about this item

    Keywords

    Carbon Pricing; CO2 Emissions; Decarbonization; Carbon Tax; Climate Change; Climate Policy;
    All these keywords.

    JEL classification:

    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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