National Experiences in Environmental Sustainability
Critical Issues in Environmental Taxation series
Edited by Larry Kreiser, David Duff, Janet E. Milne and Hope Ashiabor
Chapter 4: Signaling effects of carbon tax in Sweden: an empirical analysis using a state space model
When estimating the effects of environmental taxation, one of the simplest and most general ways is to estimate the price elasticity of energy demand. If introduction of a carbon tax causes a unit increase in the energy price, energy demand will decrease in proportion to the negative value of the price elasticity. In general, the effects of the increase in energy price are estimated regardless of what causes the price increase. There is a hypothesis, however, that changes in consumer prices as a result of an introduction of, or an increase in, an environmental/energy tax rate may send a different signal to consumers, compared with other changes in consumer prices such as those due to the producer price. That is, regarding carbon/energy taxes, the hypothesis insists that a unit change in the tax rate may have a stronger incentive effect on energy demand than the same change in the producer price, and Ghalwash (2007) calls this a ‘signaling effect’. Based on time series data on non-durable consumer demand in Sweden, Ghalwash (2007) investigated whether the signaling effect existed by estimating tax elasticity and price elasticity separately, and his results show that Swedish consumers are more sensitive to a tax change than a producer price change for some energy goods; however, for transport, the results show no significant difference between energy taxes and producer prices.
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