Carbon pricing and the elasticity of CO2 emissions

Abstract:

We study the impacts of carbon pricing on CO2 emissions across five sectors for a panel of 39 countries covering 1990–2016. Constructing new sector-level carbon price data, we implement a novel approach to estimate the changes in CO2 emissions associated with (i) the introduction of carbon pricing regardless of the price level, (ii) the elasticity of emissions with respect to the price level, and (iii) the potential response of future emissions to possible carbon price trajectories. Using a synthetic control factor model, we find that the introduction of carbon pricing has reduced growth in total aggregate (national) CO2 emissions by 1–2 percent on average relative to imputed counterfactuals, with most abatement occurring in the electricity and heat sector. Exploiting variation in observed carbon prices to explain heterogeneity in treatment effects, we decompose the average treatment effect obtained from the synthetic control factor model to distinguish the effect of merely introducing a carbon price from the effect of the price level itself. We find a small and imprecisely estimated semielasticity of a 0.03 percent reduction in emissions growth per average $1/metric ton of CO2. Simulating the response of future global emissions to several possible carbon price trajectories, we conclude that carbon pricing alone, even if implemented globally at a level equivalent to the world’s current highest recorded price in Sweden, is unlikely to be sufficient to achieve emission reductions consistent with the Paris climate agreement.