Search

Energy taxes are intended to internalize the costs of greenhouse gas (GHG) emissions and to incentivize reductions in GHG emissions; evaluating whether taxes have the desired effect on emissions is an important research question. A second tool to incentivize GHG reductions is an emissions trading system (ETS). We examine data across countries in the EU from 1996 to 2009 and find that as implicit tax rates on energy increased, carbon intensity of emissions decreased. Further, participation in an ETS also resulted in a significant reduction in overall carbon intensity. Carbon emissions can be reduced by using fuel with a lower carbon content (effectiveness) or by using less fuel per unit of output (efficiency); we decompose overall carbon intensity into effectiveness and efficiency measures. We find that as implicit tax rates on energy increased, efficiency measure improved, but effectiveness did not. The EU introduced the ETS in 2005, and we find that while participation in an ETS reduced carbon intensity, it also changed the relation between implicit tax rates on energy and carbon intensity. Specifically, there is a significant inverse relationship between implicit tax rates on energy and all three carbon intensity measures prior to the imposition of the ETS, but after imposition of the ETS, implicit tax rates on energy are only significantly inversely related to the efficiency measure. We suggest that the need to immediately reduce emissions below a specified cap encourages companies to focus on efficiency measures with immediate results, potentially at the expense of effectiveness initiatives. These trade-offs have potential implications for long-run policy outcomes.

Businesses are often subject to energy taxes that impose a charge on greenhouse gas emissions. Theoretically, energy taxes should motivate business spending on emissions abatement up to the point that, at the margin, the cost of reducing emissions equals the amount of the tax that is avoided. We use European Union (EU) data from 2001 to 2008 to test the hypothesized positive relationship between energy taxes and business spending on abatement initiatives for the protection of ambient air and climate. We find that while overall business spending and business investment expenditures are positively related to energy tax rates, current period expenditures are not related to energy tax rates. Supplemental analyses indicate that the imposition of the EU Emissions Trading Scheme (ETS) in 2005 affected these relationships. In the pre-ETS period, energy taxes were not related to overall business spending or to current period expenditures, but there was a significant positive relationship between energy taxes and investment expenditures. After the ETS was introduced, there was a significant positive relationship between energy tax rates and both overall business spending and business current period abatement expenditures, but the relationship between business investment spending and energy tax rates was not significant. Our results indicate that energy taxes are effective in motivating business spending on emissions abatement. However, the nature of the effect varies across investment spending and current period expenditures. As both long-term and current initiatives are necessary to meet abatement goals, policymakers should be aware of these differences.