The Economic Consequences of Effective Carbon Taxes

This paper studies the sectoral and macroeconomic consequences of carbon taxes in four Nordic countries using a novel monthly measure of effective carbon tax rates. The suggested measure accounts for the time-varying emission coverage of taxes that are both explicitly and implicitly levied on greenhouse gas-emitting goods, thereby solving several issues of existing carbon tax measures currently used by the literature. Employing the new measure in a local projection setting, I find that carbon taxes reduce emissions as expected but also impair macroeconomic activity—though there is some heterogeneity in the effects across sectors and countries. (JEL H23, O44, Q54, Q58)