The effect of carbon pricing on firm emissions: Evidence from Swedish CO2 tax

Swift policy action is essential to address human-caused climate change. Economists propose a global carbon tax as a key solution. Several countries have implemented local carbon pricing, however, the effectiveness of these measures in reducing CO2 emissions from companies remains uncertain. Misum researchers explore the effectiveness of local carbon pricing in reducing CO2 emissions from companies, within the context of Sweden.

The Academic Insight is based on the research article: “The Effect of Carbon Pricing on Firm Emissions: Evidence from the Swedish CO2 Tax” published in the Review of Financial Studies in 2024.

Swift policy action is essential to address human-caused climate change. Economists propose a global carbon tax, possibly paired with green innovation subsidies, as a key solution. While there is no universal agreement on this, several countries have implemented carbon pricing. However, the effectiveness of these measures in reducing CO2 emissions from companies remains uncertain.

To shed light on this issue, Misum researchers Gustav Martinsson, László Sajtos, Per Strömberg, and Christian Thomann focus on Sweden, which implemented a carbon tax in 1991. They analyze a unique dataset covering CO2 emissions from Swedish manufacturing firms over 26 years to estimate the impact of carbon pricing on firm-level emission intensities.

Findings

The study estimates an emission-to-pricing elasticity of around two, albeit with substantial heterogeneity across subsectors and firms, where higher abatement costs and tighter financial constraints are associated with lower elasticities. A simple calibration suggests that without carbon pricing, CO2 emissions from Swedish manufacturing in 2015 would have been roughly 31% higher.

Implications

By examining short-term and long-term responses to carbon pricing and exploring the role of financial constraints in firms' ability to invest in emission reduction, this research contributes to a deeper understanding of the economic and environmental implications of carbon pricing.

Read the full Misum Academic Insight here.

Authors:

Gustav Martinsson, Stockholm Business School, Mistra Center For Sustainable Markets and Swedish House of Finance
László Sajtos, Konjunkturinstitutet, Mistra Center For Sustainable Markets and Swedish House of Finance
Per Strömberg, Stockholm School of Economics, Mistra Center For Sustainable Markets and Swedish House of Finance
Christian Thomann, Royal Institute of Technology and Mistra Center For Sustainable Markets and Swedish House of Finance