Carbon Pricing and Firm-Level CO2 Abatement: Evidence from a Quarter of a Century-Long Panel
Sweden, as one of the first countries in the world, introduced a carbon tax in 1991. In our study, we assemble a unique and comprehensive dataset tracking all CO2 emissions from the Swedish manufacturing sector between 1990 and 2015, then estimate the impact of carbon pricing (through taxes and traded emission rights) on firm-level emissions. We first document that the vast majority of manufacturing CO2 emissions can be attributed to a few sub-sectors, in which, due to the design of the carbon tax, firms were often taxed at low or zero marginal tax rates. In panel regressions, spanning twenty-six years and around 4,000 manufacturing firms, we find a statistically robust and economically meaningful inverse relationship between CO2 emissions and carbon pricing. We estimate the CO2 emissions-to-carbon pricing elasticity to be 2 for the manufacturing sector. Finally we perform a simple calibration exercise using our estimated elasticities. Aggregate manufacturing CO2 emissions decreased by about 31% between 1990 and 2015. Through its effect on reduced emission intensities, we estimate that carbon pricing accounts for between one and two thirds of this decrease.