Carbon pricing and emissions: Causal effects of Britain's carbon tax

Abstract

This study estimates that the introduction of a carbon tax in the British power sector in 2013 and its two subsequent elevations in 2014 and 2015 led to a substantial decline in electricity-related CO2 emissions by 26% (or 38.6 MtCO2) within only three years. Identification of the causal effect relies on discontinuities in electricity generation induced by the policy changes and on a novel and detailed dataset of hourly emissions from all British fossil-fuel power stations. Notably, the carbon tax changed power plants' marginal costs according to their emission intensity, so that “dirty” coal was pushed out of the market, whereas “cleaner” gas filled a large share of the production gap. Our findings suggest that even a moderate carbon tax can induce significant abatement, supporting the notion that a market-based climate policy should be viewed as a viable policy option. We also discuss limitations of this national tax, such as that it likely created emissions abroad via imports and the waterbed effect within the EU Emission Trading System.