Cars, carbon taxes and CO2 emissions

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.