Greenhouse gas emissions - do carbon taxes work ?

During the last decade, Norway has carried out an ambitious climate policy by implementing a relatively high carbon tax already in 1991. The Norwegian carbon taxes are among the highest in the world. Data for the development in CO2 emissions provide a unique opportunity to evaluate carbon taxes as a policy tool for CO2 abatement. We combine a divisia index decomposition method and applied general equilibrium simulations to decompose the emission changes, with and without the carbon taxes, in the period 1990-1999. We find that despite significant price increases for some fueltypes, the carbon tax effect on emissions was modest. The taxes contributed to a reduction in onshore emissions of only 1.5 percent and total emissions of 2.3 percent. With zero tax, the total emissions would have increased by 21.1 percent over the period 1990-1999, as opposed to the observed growth of 18.7 percent. This surprisingly small effect relates to the extensive tax exemptions and relatively inelastic demand in the sectors in which the tax is actually implemented. The tax does not work on the levied sources, and is exempted in sectors where it could have worked.