The Impacts of the Climate Change Levy on business: Evidence from Microdata

Ralf Martin (), Ulrich J. Wagner and Laure B. de Preux

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: We estimate the impacts of an energy tax - the Climate Change Levy (CCL) - on the manufacturing sectorusing panel data from the UK production census. Our identification strategy builds on the comparison of trendsin outcomes between plants subject to the CCL and plants that were granted an 80% discount on the levy afterjoining a so-called Climate Change Agreement (CCA). Since the CCAs stipulate specific targets for energyusage or carbon emissions, this comparison yields a lower bound on the impact of the discount. To address alikely selection endogeneity in CCA participation, we adopt an IV approach that exploits exogenous variation inpollution discharges that determined eligibility for CCA participation. We find robust evidence that CCAparticipation had a strong positive impact on growth in both energy intensity and energy expenditures. Ananalysis of fuel choices at the plant level reveals that this effect is mainly driven by stronger growth inelectricity use and translates into a positive impact on CO2 emissions. We do not find any statisticallysignificant impacts of the tax on employment, gross output or total factor productivity. We conclude that, hadthe CCL been implemented at full rate for all businesses, further cuts in energy use of substantial magnitudecould have been achieved without jeopardizing economic performance.

Keywords: Climate change; Climate Change Levy (CCL); Climate Change Agreement (CCA); trends; firmbehaviour (search for similar items in EconPapers)
JEL-codes: Q41 Q48 Q54 D21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene and nep-env
Date: 2009-03
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