Effectiveness of Carbon Pricing Policy: An Empirical Analysis

Carbon taxation has emerged as an effective policy tool for combating global climate change. This study investigates the impact of carbon pricing on carbon emissions and the carbon footprint (CF) in selected countries that were among the first to adopt carbon taxation, using panel data from 1992 to 2021. We apply a range of econometric methods to address specific data challenges, including cross-section dependence tests to explore interdependencies among countries; Delta homogeneity tests to check whether variables are homogeneous across the panel; second-generation panel unit root tests (robust against cross-section dependence) to assess the stationarity of variables; and the Gegenbach et al. [2016] panel cointegration test (robust to both cross-section dependence and heterogeneity) to identify long-term relationships. We also use the panel Dynamic Ordinary Least Squares Mean Group (DOLSMG) estimator to estimate long-run coefficients, considering both heterogeneity across the panel and cross-section dependence. Finally, the Dumitrescu and Hurlin [2012] panel causality test —which also accounts for heterogeneity and cross-section dependence — is employed to examine causal relationships. The results indicate that carbon pricing effectively reduces both carbon emissions and CF. Moreover, the findings reveal a cointegrating relationship among the variables, as well as a unidirectional causal relationship from carbon pricing to both carbon emissions and CF.