Carbon Pricing Efficacy: Cross-Country Evidence

Abstract

To date there has been an absence of cross-country empirical studies on the efficacy of carbon pricing. In this paper we present estimates of the contribution of carbon pricing to reducing national carbon dioxide (CO2) emissions from fuel combustion, using several econometric modelling approaches that control for other key policies and for structural factors that are relevant for emissions. We use data for 142 countries over a period of two decades, 43 of which had a carbon price in place at the national level or below by the end of the study period. We find evidence that the average annual growth rate of CO2 emissions from fuel combustion has been around 2 percentage points lower in countries that have had a carbon price compared to countries without. An additional euro per tonne of CO2 in carbon price is associated with a reduction in the subsequent annual emissions growth rate of approximately 0.3 percentage points, all else equal. While it is impossible to fully control for all relevant influences on emissions growth, our estimates suggest that the emissions trajectories of countries with and without carbon prices tend to diverge over time.

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Notes

  1. 1.

    ‘Initial’ refers to the year that is at the start of the growth period.

  2. 2.

    The Kaya Identity decomposes CO2 emissions into four factors: population * GDP per capita * the energy intensity of GDP * the carbon intensity of energy.

  3. 3.

    Controlling for economic growth also removes effects of carbon pricing that transpire via a change in the GDP growth rate. Computable general equilibrium studies sometimes find small adverse effects of a carbon price on GDP growth (Li et al. 2014, for example), although this would depend on how a carbon pricing scheme is designed. A negative and significant effect remains when the GDP per capita growth control is omitted.

  4. 4.

    We obtain similar results when excluding these countries (see robustness tests in the Online Appendix; Table A.2). We also present robustness tests using a binary carbon pricing variable for different periods (such as three or four years; Table A.3), finding similar results.

  5. 5.

    The feed-in tariff and renewable portfolio standard variables are not included in the same regressions as the renewable policies score variable given the similarity of these measures.

  6. 6.

    The Online Appendix also includes regressions that control for the feed-in tariff and renewable portfolio standard variables instead of the renewable energy policies score variable. The carbon price coefficients remain similar (Tables A.6 and A.7).

  7. 7.

    The net gasoline tax is measured as the gap between the local and the international benchmark prices. This gap will be affected by whether a carbon price is in place.

  8. 8.

    exp(− 0.128) − 1 = –12%.

  9. 9.

    The binary carbon-pricing variable has a value of 1 for Australia in 2014, 0 in 2015 due to abolishment of carbon pricing, and a value of 1 again in 2016 due to the introduction of the Emissions Reduction Safeguard Mechanism.

  10. 10.

    This is based on the average associations in regressions with the policy controls in Tables 4 and 6.

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Acknowledgements

This work was supported by the Australian Research Council under grant DE160100750. We thank participants at conferences and seminars at the Australian National University, Nanyang Technological University, Macquarie University, the Australasian Agricultural and Resource Economics Society Conference 2019, and the 7th International Association for Energy Economics Asia-Oceania Conference in 2020. We thank David Stern, Kenneth Baldwin, and Bruce Mountain for comments. Author contributions: RB and PB contributed to the conceptualisation of the study, econometric analysis, and writing. FJ contributed to the conceptualisation of the study, review of estimations, and interpretation of results.

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Best, R., Burke, P.J. & Jotzo, F. Carbon Pricing Efficacy: Cross-Country Evidence. Environ Resource Econ (2020). https://doi.org/10.1007/s10640-020-00436-x

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Keywords

  • Carbon dioxide emissions
  • Carbon pricing
  • Carbon tax
  • Cross-country
  • Emissions trading
  • Fossil fuel policies
  • Growth rates
  • Renewable energy policies

JEL Classification

  • O57
  • Q43
  • Q48
  • Q50
  • Q58