The mere discussion of a carbon tax has been met by a fierce response from ultra conservatives who claim that pricing carbon is a direct assault on American productivity and competitiveness, asserting that support for a carbon tax equates to “political poison.” However, hysteria should not be viewed as sound policy analysis, and an examination of the empirical literature reveals that carbon taxes can achieve emissions reductions without disrupting the economic competitiveness of firms.
Although model projections of carbon tax policies are useful, evaluation of past and present carbon tax schemes is a necessary aspect of sound and well-crafted policy analysis. A review of ex post evidence on the impacts of carbon pricing does demonstrate that carbon taxes are an effective environmental policy instrument with no substantial negative effects on competitiveness.
A recent study published in the Journal of Public Economics analyzes the impact of a carbon tax designed to curb industrial CO2 emissions on the competitiveness of manufacturing plants in the UK. The Climate Change Levy (CCL) was met by vehement opposition who argued that the tax would mean regulated firms would lose international competitiveness, reduce their labor force, and even exit the market. In order to evaluate the substantiality of these claims, the study used rigorous econometric techniques to estimate the impact of the CCL on energy use, emissions, and economic performance. The identification strategy was to compare changes in outcomes between firms paying the full CCL rate and firms paying only a fraction of the tax, which the authors argue is not very different from business-as-usual scenarios. Using this approach, they found:
“robust evidence that the CCL had a strong negative impact on energy intensity and electricity use.” In contrast, they “do not find any statistically significant impacts of the tax on employment, revenue (gross output), total factor productivity or plant exit”
Figure 1: Trends in outcome variables by treatment status. Vertical line indicates beginning of treatment.
Additionally, the firms subjected to the full tax rate under the CCL decreased both their electricity use and total CO2 emissions by 22.6% and 7.3% respectively. It is clear that the results of this study do not substantiate the claims about the devastating effects of the CCL on the competitiveness of UK manufacturing firms. These findings parallel a similar study of a German electricity tax, which found that paying a higher tax had no robust impact on a firm’s turn-over, investments, value-added, or employment. It is clear that ex post analyses of carbon tax schemes offer very little evidence, if any, of devastating economic consequences.
It is expected, and even necessary, that carbon tax schemes, as well as any public policy, be scrutinized and critiqued. However, categorizing any attempt at carbon pricing as inherently crippling to the American economy and devastating to the labor market is unjustifiable and arguably dangerous when considering the potential costs of climate change. An examination of the empirical literature surrounding carbon pricing offers an optimistic picture, whereby obtaining environmental improvements does not come at the cost of economic competitiveness.