Conference Agenda

This paper provides the first comprehensive analysis of how firms in emerging economies respond to carbon taxation, leveraging detailed administrative data from South Africa – a potential trailblazer for other developing countries with limited state capacity amid the growing global push for carbon pricing. We examine the dynamic impacts of the carbon tax on firm-level outcomes – such as profits, sales, capital, and labor inputs – across manufacturing and mining firms, which are key sectors in the context of the carbon tax. Contrary to concerns that carbon taxes may hinder economic growth or reduce employment, our findings show no evidence of negative average impacts on firm performance or jobs. However, this overall result masks significant heterogeneity in the tax’s effects across sectors, driven by the sector-specific design elements of the South African carbon tax. Firms expecting higher effective tax rates may have intensified their use of emission-intensive machinery and depreciated capital in anticipation of the tax. This behavior appears to stem from firms resolving regulatory uncertainty or seeking to recover costs from stranded assets.