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The Effectiveness of Revenue-Neutral Carbon Taxes

Younes Ahmadi and Akio Yamazaki ()

No 19-36, GRIPS Discussion Papers from National Graduate Institute for Policy Studies

Abstract: This paper investigates the effectiveness of carbon taxes in the manufacturing sector by examining British Columbia's revenue-neutral carbon tax. We theoretically demonstrate that the magnitude of plants'exposure to the policy monotonically increases with its emission intensity. Using detailed confidential plant-level data, we directly exploit the variations in plants'emission intensity to isolate the emission effect of the policy. We find that the carbon tax lowers emission by 2 percent. Furthermore, we find that the policy had a positive output effect, suggesting that the carbon tax encouraged plants to produce more with less energies. These findings are possibly due to the revenue neutrality of the policy, especially through the reduction of the corporate income taxes. It incentivized plants to invest in both energy-saving and productivity-enhancing technologies.

Pages: 27 pages
Date: 2020-03
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Handle: RePEc:ngi:dpaper:19-36