Market Based Instruments

Market Based Instruments

National Experiences in Environmental Sustainability

Critical Issues in Environmental Taxation series

Edited by Larry Kreiser, David Duff, Janet E. Milne and Hope Ashiabor

This detailed book explores how market based environmental strategies are used in various countries around the world. It investigates how successful sustainability strategies used by one country can be transferred and used successfully in other countries, with a minimum of new research and experimentation. Leading environmental taxation scholars discuss this question and analyse a set of key case studies.

Chapter 4: Signaling effects of carbon tax in Sweden: an empirical analysis using a state space model

Yasushi Ito

Subjects: economics and finance, environmental economics, public finance, environment, environmental economics, environmental law, law - academic, environmental law, tax law and fiscal policy


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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