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The impacts of the Climate Change Levy on business: evidence from microdata

  • Ralf Martin
  • Laure B. de Preux
  • Ulrich J. Wagner

We estimate the impacts of an energy tax � the Climate Change Levy (CCL) � on the manufacturing sector using panel data from the UK production census. Our identification strategy buildson the comparison of trends in outcomes between plants subject to the CCL and plants that weregranted an 80% discount on the levy after joining a so-called Climate Change Agreement (CCA). Since the CCAs stipulate specific targets for energy usage or carbon emissions, this comparisonyields a lower bound on the impact of the discount. To address a likely selection endogeneity in CCA participation, we adopt an IV approach that exploits exogenous variation in pollution discharges that determined eligibility for CCA participation. We find robust evidence that CCA participation had a strong positive impact on growth in both energy intensity and energy expenditures. An analysis of fuel choices at the plant level reveals that this effect is mainly driven by stronger growth in electricity use and translates into a positive impact on CO2 emissions. We do not find any statistically significant impacts of the tax on employment, gross output or total factor productivity. We conclude that, had the CCL been implemented at full rate for all businesses, further cuts in energy use of substantial magnitude could have been achieved without jeopardizing economic performance.

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Paper provided by Grantham Research Institute on Climate Change and the Environment in its series GRI Working Papers with number 6.

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Date of creation: Aug 2009
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Handle: RePEc:lsg:lsgwps:wp06
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