What do microdata tell us about the impact of carbon taxes in manufacturing and agriculture?

Do carbon taxes kill manufacturing?

The authors of a new paper on British climate change policy suggest: no.

They examine the scheme introduced by the Blair government that either taxed businesses on their energy consumption (the carbon tax element, known as the Climate Change Levy, or CCL) or, if the company was a plant operating in a sensitive industry, required them to make a ‘Climate Change Agreement’ (CCA), which set an emissions reduction target in exchange for a tax discount on the CCL. The levy was not a pure carbon tax: the rate of taxation varied by energy source (so, for example, coal was taxed at a rate of 0.15 pence per kilowatt hour: an implicit carbon tax of 31 pounds per ton of carbon dioxide emitted).

The existence of the agreements also makes it slightly hard to pinpoint what impact the levy may have had: after all, companies had a choice of either the levy or the agreement. This introduces two problems: firstly, we might be interested on the impact of the levy rather than its impact relative to a signed agreement on reducing energy use. Secondly, if the companies have a choice, then it’s possible that the things that make them choose to pay the tax rather than sign an agreement might be something that is also related to the things we’re interested in, like unemployment, output, or electricity usage. (For example, imagine that all biscuit tin manufacturers in Britain are likely to choose to sign an agreement because they think it will be more affordable than paying the full tax in the very short run and the reason they’re looking for the more affordable option in the very short run is they’re nearly bankrupt, because no one buys biscuit tins anymore. Then the fact they then go bankrupt and fire all their employees one year later may not have anything to do with the fact that they signed a Climate Change Agreement.)

The authors’ response to the first problem is to argue that the Climate Change Agreements were fairly toothless, for several reasons:

First, the government may have “double counted” carbon savings from the CCA scheme…On average, CCA targets were supposed to improve energy efficiency by 11% between 2000 and 2010. This figure is well above the 4.8% improvement the government expected to occur under a “business as usual” (BAU) scenario…However, alternative BAU scenarios were much closer to the CCA target, projecting energy efficiency of all UK industry to improve by 9.5%…or even 11.5% when taking into account the effect of the CCL

In other words, the agreements may have been aiming for a target that was going to be met anyway.

Second, there was massive over-compliance with CCA targets. Combined annual carbon savings in all CCA sectors were substantially larger than the 2010 target throughout the first three compliance periods. At the end of the first compliance period in 2002, CCA sectors reported savings of 4.5 MtC — almost twice the target amount of 2.5 MtC to be achieved by 2010…Facilities were re-certified for the reduced tax rate even if they had missed their target, provided that the sector as a whole met its target…Finally, a large degree of flexibility in both the target negotiations and the compliance review further limited the stringency of CCA targets. For instance, CCA sectors could choose their own baseline year for the target indicator. More than two thirds of all sectors chose a baseline year prior to 2000 (in some cases going as far back as 1990), allowing them to count carbon savings unrelated to the CCA towards target achievement

What about the second problem? Remember that firms got to choose whether they would sign an agreement or pay the tax, and the things that made them choose one way or another might muddy our estimates of the impact of the tax over the levy.

The way the authors get around this by using an instrumental variable: eligibility for the program. (For those of you who unfamiliar with the delights of instrumental variable analysis, suffice it to say that it’s a statistical technique that allows us to correct for a lack of randomness. Some plants were eligible to opt for a CCA instead of paying the full carbon taxes while others weren’t.

The essence of the findings are summed up in the graph below. The grey solid lines represent firms that used a Climate Change Agreement; the black solid lines represent those that paid the full tax. A dotted grey line means that the firm was eligible for the CCAs; the dotted black line means that the firm wasn’t eligible.

energy use



Before 2001, you can’t see much of a systematic difference between the four types of plants (the authors confirm this statistically).

What about after 2001? As you’d expect if the higher implicit carbon tax imposed additional costs on energy usage, there are significant differences between the grey lines (3% carbon tax) and the black lines (15% tax) after the introduction of the levy in 2001. In both energy expenditure and electricity use and ‘energy share in gross output’ (how much energy went into the making of manufactured goods), the carbon tax had a downward impact. In employment, though, it’s hard to distinguish any particular impact of the carbon tax over the CCAs: it seems as though the carbon tax did not lead to lower unemployment in manufacturing than would otherwise have been the case (assuming the CCAs were toothless), although it is perhaps worth pointing out that manufacturing jobs did decline after the carbon tax was imposed, just as they were declining before it was imposed. Nor did the UK carbon tax seem to lead to manufacturing companies leaving the market, either:

In sum, we find no evidence that the CCL had an impact on plant exit decisions.


Overall, what’s the conclusion?

We do not find evidence of a detrimental effect of the CCL on employment, regardless of which way the data are cut

One of the authors has also cowritten a working paper arguing that there were no discernible effects of the European Union’s emissions trading scheme on manufacturing output or jobs in the

Do carbon taxes kill agriculture?

Over the Atlantic, the Canadian experience tends to suggest: no.

In 2008, the province of British Columbia introduced a carbon tax on fuels. Some agricultural producers complained that this was making agriculture ‘uncompetitive’, and they obtain exemptions. Nicholas Rivers and Brandon Schaufele from the University of Ottowa decided to check out the figures to see if this was true.

The authors are primarily interested in agricultural exports: did the carbon tax have any effect on them? They build a statistical model that incorporates BC’s comparative advantage in each good (reflecting factors like the climate, the quality of the soil and so on), factors that affect that Canadian economy as a whole (like tariffs and the exchange rate) and various weather-related variables. Finally, there’s a variable that indicates whether there was a carbon tax or not. When they squish the data through the machine, they find that the BC carbon tax either had a positive impact on the share of agricultural production in BC that was exported, or no impact. (If you exclude some commodities like wheat and barley that are marketed in monoposonistic ‘single-desk’ arrangements then there’s no impact.)

The authors give two possible reasons for a potentially positive impact on agricultural exports: firstly, standard economic theory tells us that when one factor of production (in this case, ‘carbon’, or, to be more precise, production processes that result in carbon dioxide emissions) becomes more expensive, then we produce fewer goods that use that factor of production more intensely and more goods that don’t use it intensely. If agriculture is more labour-intensive than carbon-intensive, then making it more expensive to emit greenhouse gases should lead to an expansion in the agricultural sector.

Another possibility they mention is that the price signal given by the carbon tax forced businesses to innovate in order to use less fossil fuels, and this overcompensated for the burden of the tax.


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