Does carbon tax promote green trade and comparative advantages: evidence from Panel Difference-In-Difference (DID) causal experiment

The carbon tax was the first fiscal tool introduced in the early 1990s to mitigate emissions and stabilize global climate. Following a few decades of implementing carbon pricing policies, it is now imperative to evaluate how these tools impact international trade patterns, competitiveness, and the transition to low-carbon markets. Against this backdrop, this paper investigates the causal effect of carbon tax intervention on green trade and comparative advantages by utilizing a Panel Difference-in-Difference (DID) approach. The analysis draws on data from 208 countries over the period 1994–2022 calibering natural experimental econometrics. Results reveal a positive and statistically significant average treatment effect in green trade metrics, including exports, imports, trade volume, and competitiveness in countries ordained carbon tax. These findings underscore the efficacy of carbon taxation in incentivizing the production, consumption, and exchange of green goods. Additionally, heterogeneity in the causal effects of carbon taxation is observed across different country cohorts and time periods, highlighting that the initial gains from early carbon pricing policies have plateaued. Thus, the government should meticulously launch complementary policies like carbon tariffs, stricter regulations on carbon havens, ecolabelling, green investment tax credits, and climate industrial policies to maintain the momentum of green trade and optimize comparative advantages.