Dosis facit effectum why the size of the carbon tax matters: Evidence from the Swedish residential sector

After 25 years of gradually increasing its carbon tax, Sweden now imposes the world's highest tax on carbon dioxide emissions. This paper examines the effect of the Swedish carbon tax on residential carbon emissions by using European panel data. We employ synthetic control methods (SCMs) and perform difference-in-difference (DiD) regressions to evaluate the causal impact of carbon taxation on carbon emissions in the residential sector. We provide evidence that early-2000s carbon tax augmentation had a causal effect on residential carbon emissions. We find that the reduction of residential carbon emissions stemming from the carbon tax augmentation ranges from 200 kg (when compared with other countries with a carbon tax of more than 20 euro) to 800 kg (when compared with countries without a carbon tax) of CO2 per capita per year. Hence, the evidence suggests that carbon taxation is an effective tool for reducing residential CO2 emissions and, in turn, mitigating climate change.