Paul L. Caron

Thursday, November 17, 2022

Jacob Presents How Effective Are Emission Taxes In Reducing Air Pollution? Today At The OMG Transatlantic Tax Talks

Martin Jacob (WHU–Otto Beisheim; Google Scholar) presents How Effective are Emission Taxes in Reducing Air Pollution? today as part of the  OMG Transatlantic Tax Talks Series (OMG = Oxford-Michigan-MIT-Munich-Georgetown):

JacobThis paper examines the role of environmental taxes in reducing emission output. Using unique satellite data to observe levels of nitrogen dioxide (NO2), we leverage an emission tax introduction in 2013 in the Autonomous Community Valenciana. We find that this environmental tax reduced NO2 levels by 1.8%. While the effect does not depend on the prevalence of dirty versus clean industries, we find that the NO2 burden is reduced more substantially in large industry areas, urban regions, and in areas with innovative and large firms.

Policy Implications and Conclusion
This paper investigates the impact of an emission tax on emission levels, leveraging a local tax on NOx emissions in Spain in 2013 and unique multitemporal satellite data on levels of NO2. Our results show that the local Spanish emission tax can reduce the actual NO2 burden by about 1.2%. The effect depends on the industrial activity and technological innovativeness. Large industry areas with many firms, highly urbanized areas as well as areas with a high degree of innovative or larger firms reduce emissions more in response to the emission tax reform than, for example, rural areas or areas with smaller firms. However, we also find that areas with more dirty industries exhibit no significantly different reduction in NO2 levels as areas with cleaner industries. This result contrasts the ‘polluter pays’ principle and suggests that emission taxes might not target necessarily only dirty firms but that the effects spill over to cleaner firms, explaining also the rather modest aggregate response.

Our findings thus have important implications for the debate of the optimal design of emission taxes. While the emission tax seems to be effective by leading to a net decrease in emissions, it does not directly target those firms that are mainly responsible for emissions, but hits predominantly industrial areas. This is because ‘dirty’ firms may pass on taxes to ‘clean’ firms (Jacob and Zerwer 2022). However, the cut in emissions seems to be particularly accelerated via innovation and technology improvements. Thus, while introducing emission taxes is the first step towards achieving zero emission targets, there is a need to combine it with other complementary policy measures to support R&D investments and innovation to accelerate the reduction as well as a more targeted design to make the real polluters pay.

We acknowledge that our analysis has several limitations. First, while the local setting of the Valencian Community has many advantages, our findings may not generalize to other countries and settings. This can be explored in future research. Second, the reform in our setting has been almost 10 years ago. Advancements in abatement technologies since then are highly likely. Thus, future research could focus on a more recent setting. Third, as we measure the integrated NO2 amount from satellite the contributions from different sectors are mixed and a direct correlation to emissions from industry can only be made by several assumptions, although we can still see that industrial concentration and urbanization plays an important role in the tax effect on emissions. Fourth, due to our empirical matching approach, treatment and control group give only with limited weight to hot spots such as Barcelona or Madrid. While our findings give a some indication about a potential response for more urbanized areas, we cannot make direct statements about large city hubs. Fifth, while complementary policy options in addition to an emission tax might be meaningful to target specifically polluting firms, we cannot make any statements about the effectiveness of such policies. Future research could concentrate on the combined effect of emission taxes and other environmental policy measures.

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