New paper on carbon tax effects co-authored by Johannes Brehm published in Journal of Public Economics

In a new article published by the Journal of Public Economics, Johannes Brehm, Hertie School PhD candidate and research associate at RWI, Nils aus dem Moore, Adjunct at the Hertie School, and Henri Gruhl from RWI analyse whether carbon taxes stimulate low-carbon innovation in the transport sector. They analyse Sweden’s 1990/1991 tax reform, which introduced both a carbon tax and a value-added tax on transport fuels. Employing the synthetic control method to construct a counterfactual scenario, the authors find that the tax reform led to a significant and sustained increase in low-carbon patenting in Sweden’s automobile sector over a 15-year period. 

The study disentangles the tax reform’s components and suggests that the carbon tax, rather than fuel price increases alone, was the primary driver of this effect. Contrary to fuel price elasticities, a carbon tax seems more effective than VAT and energy taxes because it is perceived by firms and consumers as a durable policy measure, encouraging investments in cleaner technologies.  

"Smart CO2 pricing can cut emissions while fostering competitive advantages through technological leadership," says Hertie School researcher Johannes Brehm. "Long-term policy certainty is crucial: if firms trust CO2 pricing to persist and rise, they will invest and innovate. Future research should test whether this holds across sectors." 

The study underscores the importance of carbon pricing as a tool in fighting climate change. The researchers indicate that credible carbon pricing schemes drive innovation which, in turn, reduces the costs of achieving ambitious climate targets.

Read the full paper here.

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