This paper delivers the first comprehensive analysis of how firms respond to carbon taxation in emerging economies. Our evidence builds on exhaustive administrative data from South Africa, the 13th largest emitter worldwide. The presented results are twofold. First, we establish stylized facts on the types of firms that are affected, how much revenue is generated from which sector and which share of national emissions the tax is able to capture. Second, we study the dynamic impact of the carbon tax on firm-level outcomes such as sales, profits, capital and labor inputs. We show that the design of the South African Carbon Tax leads to substantial heterogeneity across sectors in terms of how strongly firms are affected. Contrary to the concern that carbon taxes may impede economic growth we measure no negative effects on firm performance on average.

A central concern in climate policy making is that increasing carbon costs unilaterally would impair economic activity and competitiveness. Using comprehensive microdata, this paper provides first international firm-level evidence on the joint performance effects of carbon policies. Shadow prices of fossil energy sources are employed as an integral and internationally comparable measure of carbon costs. We evaluate the impact of carbon costs on various dimensions of economic activity for up to 3.1 million firms from 32 countries and 15 competitiveness-prone industrial sectors in the period 2000-2019. Carbon costs hardly hurt most industrial firms and predominantly elicited adaptation rather than relocation responses. Economically modest employment reductions were concentrated in capital-intensive firms and small firms in emissions-intensive, trade-exposed sectors, particularly in the EU. In these sectors, large and capital-intensive firms ramped up domestic investments in response to carbon cost increases, and small firms improved productivity. Profitability and exit probabilities were hardly affected.

We identify and examine a novel welfare channel of fuel economy standards through the interaction with public transit and households' location choices. A stricter emission standard for cars decreases the marginal cost of driving and triggers a shift in modal choice from public to private transport and a rise in carbon emissions. In the long run, the modal shift exacerbates the increase in the average commute length that results from lower driving costs, as well as traffic congestion. The annual welfare cost for a 50 percent emission reduction turns out 3.7 percent (24 USD p.c.) higher than when neglecting public transport. With a larger role of public transport as in Europe, this effect rises to 11.4 percent (72 USD p.c.). An alternative fuel tax policy, by contrast, induces a modal shift towards public transport and reduces the average commute, urban congestion and the welfare cost of emission reductions.

This paper studies the effects of a significant fuel tax increase on driving and CO2 emissions. Despite the prevalence of fuel taxes, causal evidence of the effect of fuel taxes on driving and emissions is limited, and the reasons why existing estimates vary remain unexplored. Our research directly addresses these gaps in the literature by exploiting exogenous variation provided by Finland’s 2012 energy tax reform. The reform increased the tax on diesel by almost 12 euro cents per litre, while the tax on gasoline was increased by less than 3 euro cents per litre. The reform allows us to utilize a quasi-experimental setting and compare the kilometers travelled by diesel and gasoline-powered cars to identify the impacts of fuel taxes. We employ a large data set of over 2.2 million cars and their odometer readings. Our credibly causal estimates indicate a clear reduction in the kilometers driven by diesel cars.