Description:
We study the response of CO2 emissions to carbon pricing for a cross-country panel covering 1990–2016 using newly constructed sector-specific carbon price data. Unlike previous empirical studies evaluating carbon pricing impacts, we explicitly distinguish between the effects of policy introduction (regardless of the price level) and effects attributable to the price level itself. Estimating a synthetic control linear factor model with interactive fixed effects, we find that the introduction of carbon pricing has reduced growth in total (national-level) CO2 emissions by 1–2 percentage points on average relative to imputed counterfactuals, with most abatement occurring in the electricity and heat sector. Decomposing average treatment effects to identify sector-specific CO2 emissions elasticities, we derive a small and imprecisely estimated semielasticity (a 0.03% reduction in emissions growth per average $1/tCO2). This suggests that introducing a nonzero carbon price reduces emissions, but higher price levels (as observed so far) yield only marginally larger reductions. Simulating the response of future global emissions to alternative carbon price trajectories, we find that carbon pricing––even if implemented globally at the same level as the world’s current highest carbon price in Sweden––is likely insufficient to trigger emission reductions consistent with the Paris Agreement