The Effectiveness of Taxing Carbon Content of Energy Consumption The Effectiveness of Taxing Carbon Content of Energy Consumption the participants of the EAERE conference in Zurich, and the participants of various seminars at the OECD and Ifo for their insightful suggestions

Suphi Sen, Herman Vollebergh, Herman Vollebergh, We Thank, Michelle Harding, Hendrik Vrijburg, Jan Brueckner, Erdal Aydin, David Rapson, Bertrand Melenberg, Reyer Gerlagh, Malik Curuk (+4 others)
2016 unpublished
We estimate the long-run effect of a uniform carbon tax on energy consumption by using a new and unique dataset in which effective tax rates of OECD countries are calculated in terms of carbon dioxide emissions. The effective tax rates account for the widely discussed tax deductions for specific energy tax bases leading to a careful calculation of net tax rates faced by agents. We argue that taxation might be endogenous to energy consumption in the long run. In order to identify a causal
more » ... ify a causal effect, we document a positive correlation between the tax rates of neighboring countries which we then exploit in our instrumental variables estimations. Validity of our identification strategy is consistent with the strategic intergovernmental interaction theories that lead to a spatial pattern in local government policies in the presence of immobile tax bases. Our instrumental variables estimations indicate that taxing carbon content of energy use can be an effective instrument for climate policy. JEL-Codes: Q410, Q480, H230, C260.