Cars, carbon taxes and CO2 emissions

Is a carbon tax effective in reducing emissions of greenhouse gases, and thereby mitigating climate change?

This paper is one of the first empirical analyses of this question and the first to find a significant causal effect on emissions.

The author uses a quasi-experimental study of the implementation of a carbon tax and a value added tax on transport fuel in Sweden. The results show that, after the introduction of the taxes in the early 1990s, carbon dioxide emissions from the Swedish transport sector reduced by around 11 percentage points in an average year relative to a comparable synthetic control unit, with the carbon tax alone affecting a 6 percentage point reduction.

Importantly, the author also finds that the carbon tax elasticity of demand for petrol/gasoline is three times larger than the price elasticity. This finding suggests that ex-ante policy evaluations of carbon taxes that use existing price elasticities of demand to simulate emission reductions may significantly underestimate their true effect.

This paper updates an earlier version published in October 2015.