Epsilon Archive for Student Projects

Abstract

The purpose of this study is to evaluate if the Swedish carbon tax, introduced in 1991, has led to a decline in CO2 emissions in two sectors of the Swedish economy: the manufacturing industry and the household sector – and if so, to what extent. The question is approached by estimating the elasticity of demand for CO2 emissions, with respect to the total energy price and, separately, for the carbon tax. Yearly CO2 emissions for 1983-2011 are calculated using data on energy consumption in each sector. Using the Fully Modified Ordinary Least Squares model, emissions are regressed on explanatory variables derived from dual theory; tax rates, income, prices and costs of factor inputs. Graphical analysis suggests that there is a negative relationship between emissions and the price of energy in both sectors. This is supported by a negative price elasticity in the regression analysis for households (-0.24) but the elasticity for the industry is not statistically different from zero. When estimating the separate effect of the carbon tax (the so-called “signaling effect”), the elasticity in the industry is negative (-0.008), but positive (0.016) in the household sector. Estimates are significant at the 1 percent level.