The Volokh Conspiracy

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Carbon Tax

Would a Carbon Tax Kill Jobs?

A new study examines what happened in British Columbia, while a second looks at how to ensure "revenue neutrality."


A new study forthcoming in Climate Change Economics sheds light on the question of whether the adoption of a rebated or revenue-neutral carbon tax would reduce employment levels. The abstract of the paper "Do Carbon Taxes Kill Jobs? Firm-Level Evidence from British Columbia,"  by Deven Azevedo, Hendrik Wolff, and Akio Yamazaki reads:

This paper investigates the employment impacts of British Columbia's revenue neutral carbon tax. Using the synthetic control method with firm-level data, we find considerable heterogeneity in employment responses to the policy. We show that firm size matters. In particular, the carbon tax had a negative impact on large emission-intensive firms, but simultaneous tax cuts and transfers increased the purchasing power of low income households, substantially benefiting small businesses in the service sector and food/clothing manufacturing. Furthermore, we find that aggregate employment was not adversely affected by the policy. Our results provide additional insight for the "job-shifting hypothesis" of revenue neutral carbon taxes.

And here is an excerpt from their discussion section:

Our analysis shows that the BC carbon tax led the emission-intensive manufacturing sectors, particularly these sectors' large companies, to contract while it boosted employment in small businesses in the service sectors and the manufacturing (food + clothing) sector (a non-emission-intensive manufacturing sector). These "job shifts" were due to the differing impact of each of the four components of the overall BC carbon tax policy. The carbon tax itself caused reductions in employment in emission-intensive industries; income tax reductions and low carbon credits put more money into the pockets of poorer households which was spent on small day-to-day purchases, such as massage services, chiropractors, and restaurants which disproportionately benefitted the service sector; and the reduction in the small business tax, funded by the carbon tax, led to the positive employment effect we find in the small business sector.

Another recent study, "Is Revenue Neutrality in Carbon Taxation Possible in Practice? Lessons from the Canadian Experience," by Joel Wood, also draws lessons from the Canadian experience. This abstract reads:

While the potential economic efficiency, equity, and political acceptability benefits of a revenue-neutral carbon tax have been well studied, a deeper question remains about the feasibility of revenue neutrality in practice. This article provides perspective on this issue by assessing different definitions of revenue neutrality and presenting an in-depth discussion of the motivations for the adoption of revenue-neutral carbon taxes. Two examples of carbon taxes and revenue recycling implemented in Canada are examined: British Columbia's revenue-neutral carbon tax (a carbon tax with offsetting tax cuts) and the Canadian federal government's fuel charge and climate action incentive tax credit (a carbon tax and dividend). The BC case serves to highlight the inherent difficulties of assessing revenue neutrality owing to uncertainty about what would have occurred in the absence of the tax. As time passes following initial implementation of the tax, it becomes increasingly difficult to determine whether, and to what extent, government revenue, income tax rates, the overall tax structure, and the tax base might have differed had the tax not been adopted. The federal example suggests that a carbon tax and dividend policy would be better able to ensure revenue neutrality.