Carbon Taxation, Firm Performance, and Labor Demand

Carbon taxation is one of the main policy instruments for reducing greenhouse gas emissions, yet there is still limited evidence on its effects on firms and workers. This paper studies the environmental and economic effects of carbon taxation, with a particular focus on heterogeneity in labor demand across worker groups. I exploit a reform that increased the effective carbon tax for a subset of Swedish manufacturing firms between 2011 and 2018, and combine administrative firm data with matched employer-employee records in a difference-in-differences design. The reform reduced emissions by about 30%, primarily through substitution away from fossil fuels toward biofuels and district heating. It also reduced revenue and employment, with the strongest negative effects concentrated among emission-intensive firms. The employment effects are driven mainly by older workers without a high school degree, although older, highly educated workers are also negatively affected in the most exposed firms. Additional evidence suggests that firms adjusted labor demand primarily through lower hiring rather than higher separations. Scaled by the average increase in effective tax rates (measured in euro per ton CO2), the estimates imply semi-elasticities of -0.58% for emissions and -0.20% for employment among low-educated workers. These results suggest that carbon taxation can substantially reduce industrial emissions, but with concentrated labor-market costs.