Carbon pricing and the elasticity of CO2 emissions

Using newly constructed sector-specific carbon price data, we study the response of CO2 emissions to carbon pricing policies for a cross-country panel covering 1990–2016. We explicitly estimate the distinct effects of policy introduction (regardless of the price level) and effects attributable to changes in the price level, finding that omission of either element can bias estimation. Applying the generalized synthetic control method to estimate average treatment effects in five sectors based on a linear factor model with interactive fixed effects, we find that the introduction of carbon pricing has reduced annual growth in total aggregate CO2 emissions by 1 percentage point on average relative to imputed counterfactuals, with most abatement occurring in the electricity and heat sector (1.5 percentage points relative to counterfactuals). Decomposing average treatment effects to identify average interannual sector-specific CO2 emissions elasticities, we find a small and imprecisely estimated semi-elasticity (a 0.06 %age point reduction in emissions growth per average $1/tCO2). Using our semi-elasticity estimates, we simulate the response of future global emissions to plausible carbon price trajectories, finding that the global average CO2 price is estimated to need to exceed $175/tCO2 for current estimated introduction and price effects to be sufficient to trigger emission reductions consistent with the Paris Agreement.