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Do carbon taxes affect economic and environmental efficiency? The case of British Columbia’s manufacturing plants

Subal Kumbhakar, Oleg Badunenko and Michael Willox ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper evaluates the impact of British Columbia’s carbon tax on manufacturers’ economic and environmental performance in a unified modeling framework that allows for making critical distinctions between efficiency, technical change, and total factor productivity as performance measures. In contrast to most papers that examine environmental policy impacts on either the economy or the environment, our approach combines a by-production model within a stochastic frontier framework to evaluate the tax’s impacts on both economic and environmental efficiency. Our findings suggest that a 1.0% increase in the carbon tax improved manufacturers’ efficiency in producing desirable output (real sales of manufactured goods) by 0.5%. In addition, the same 1.0% increase in the carbon tax improved manufacturers’ environmental efficiency for greenhouse gas (GHGs) and carbon monoxide (CO) emissions by the same amount, 0.2%. However, the carbon tax led to lower environmental efficiency for emissions of nitrogen oxides (NOx), -0.3%. In addition, our use of a rich plant-level dataset reveals considerable heterogeneity in manufacturers’ efficiency responses to the tax. Finally, we suggest that lower efficiency levels for undesirable outputs than desirable outputs indicate that the relative cost of adjusting production processes to improve efficiency favors economic efficiency over environmental efficiency

Keywords: Efficiency; Carbon tax; Stochastic frontier model; By-production model (search for similar items in EconPapers)
JEL-codes: D24 Q51 Q58 (search for similar items in EconPapers)
Date: 2022-12
New Economics Papers: this item is included in nep-eff, nep-ene and nep-env
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