Abstract

Most theoretical models highlight the effectiveness of taxes to mitigate carbon dioxide emissions, yet little empirical evidence exists to support it. This chapter examines the real effects of carbon taxes on emissions and on carbon leakage in the European Union. The goal is to evaluate the implications of existing carbon taxes in order to shed some light on policy design. I exploit the incorporation of unilateral carbon taxes in some Member States and implement a difference-in-difference approach under various specifications, using panel data from 1980 until 2008. Results suggest that there is no compelling evidence of taxes reducing the level or growth of carbon emissions, or that they cause carbon leakage. The sub-optimal design of the policies, which include several exemptions for industrial sectors, may explain the null effects of the tax.