Are Uniform or Fragmented Carbon Taxes Optimal? Evidence from Canadian Manufacturing (Link)
A uniform carbon tax applied to all emission sources is optimal when there are no other distortions.
Yet, observed carbon prices are highly fragmented both across and within countries, and multiple
market imperfections exist. Should jurisdictions work toward a global carbon price when markets
are imperfect? Using two confidential manufacturing plant-level datasets spanning 18 years in
Canada, I document large and persistent differences in the relative carbon tax-inclusive price of
electricity to fossil fuels across both space and time. Based on these findings, I build and estimate
a quantitative model where firms choose their energy mix of fossil fuels and electricity. Firms are
heterogeneous in their productivity and fossil fuel intensity, and regions have varying degrees of
clean power. I apply the model to the Canadian manufacturing sector to estimate the impact of
carbon taxes on emissions and output. I find that uniform carbon prices do not equalize marginal
abatement costs across regions, implying that the optimal tax is not uniform. However, while optimal carbon taxes are highly fragmented, the costs of carbon tax harmonization are small, with
only a 0.05 percentage point difference in output across both regimes.
Presented at CEA 2024
Green Financing Under Credit Constraints. Theory and Evidence
In countries where political factors or institutional constraints impede the passing of carbon pricing regulations, it may be more feasible to introduce non-pricing instruments, such as green subsidies and financing, to incentivize producers to reduce emissions. There is an extensive empirical and theoretical literature that studies the impact of financial market imperfections on firm performance, both domestically and in export markets. However, only a few papers incorporate climate change and specifically analyze the impact of alleviating financial frictions in green investments. I fill this gap by first documenting the associations between firm-level economic and environmental performance indicators as well as financing constraints. I then use these facts to build a tractable model that can be mapped to the data to analyze the effects of carbon taxes and credit constraints on emissions and output.
Unilateral Carbon Taxes and Leakage: Theory and Plant-level Evidence from Manufacturing
Leakage is a potential cause for concern when carbon prices are not uniform across jurisdictions. Despite its importance in global climate policy discussions, causal evidence regarding the effect of unilateral carbon pricing on leakage is mixed, and estimates of carbon leakage rates are limited. In this paper, I use plant-level data from Canadian manufacturing and a difference-in-differences approach to empirically estimate the impact of introducing a unilateral carbon tax on the intensive margin of leakage across plants and within firms. Based on the estimates from the reduced-form regressions, I then construct an overall measure of the carbon leakage rate associated with the introduction of the British Columbia carbon tax.
A Statistical Decomposition of Carbon Dioxide Emissions in Canadian Manufacturing
I decompose the changes in carbon dioxide emissions from Canadian manufacturing into three components: the change in output, composition of clean versus dirty industries, and a technique effect resulting from improvements in carbon emissions per unit of output within each industry. There are two main findings: Between 2004 and 2019, aggregate carbon dioxide emissions in Canadian manufacturing declined by 23%, of which, the technique effect accounts for the largest share. However, the reallocation of production from clean to dirty industries dampened the reduction in carbon emissions stemming from the technique effect during the study period.
Inter-Fuel Substitution and its Implications for Climate Policy
The elasticity of substitution between fossil fuels and electricity is a key parameter in determining the impact of carbon pricing policies in climate-economy models. However, there is no clear consensus in the literature on the direction or magnitude of such relative factor demand adjustments arising from relative price changes. This paper estimates the long-run micro elasticity of substitution between fossil fuels and electricity using plant-level data on Canadian manufacturing. To account for the potential endogeneity of energy prices to demand shocks and technological differences, I use a shift-share approach to construct instruments for fossil fuel and electricity prices.
Identifying Opportunities in EU-Australia Trade in Services
(Link)