Download

March 2017: An updated version of this Working Paper is now available

Is a carbon tax effective in reducing emissions of greenhouse gases, and thereby mitigating climate change? I estimate the reduction in emissions of carbon dioxide (CO2) from the transport sector in Sweden during the years 1990 to 2005 as a result of the introduction of a carbon tax and a value added tax (VAT) on transport fuel in the years 1990-1991. To capture the causal effect on emissions I construct a synthetic Sweden, the counterfactual Sweden that does not receive the ‘treatment’ in 1990-1991, using the synthetic control method. The results show a reduction in emissions of 10.9% during the post-treatment period of 1990-2005, equivalent to 2.5 million metric tons of CO2 in the annual total. Looking at the effect of the carbon tax in isolation I estimate a post-treatment reduction of 4.9%, equivalent to 1.1 million metric tons of CO2 in an average year. The results are robust to a series of placebo tests, both in-time and in-space. Taken together, my findings show that a carbon tax can be an efficient tool to mitigate climate change.

Keep in touch with the Grantham Research Institute at LSE
Sign up to our newsletters and get the latest analysis, research, commentary and details of upcoming events.