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Carbon Tax and Energy Intensity: Assessing the Channels of Impact using UK Microdata

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  • Morakinyo O. Adetutu
  • Kayode A. Odusany
  • Thomas G. Weyman-Jones

Abstract

Prior empirical studies indicate that carbon taxes have a negative impact on energy intensity, yet, the literature is unable to shed much light on the channels through which a moderate carbon tax reduces industrial energy intensity. Using a two-stage econometric approach, we provide the first comprehensive analysis of the five components of the energy intensity gain (EIG) arising from the UK climate change levy (CCL). First, we propose an EIG decomposition based on a stochastic energy cost frontier and a confidential panel of UK manufacturing plants covering 2001-2006. In the second stage, we identify the impact of the CCL on EIG components using an instrumental variable (IV) approach that addresses the endogeneity of the carbon tax rules. Factor substitution and technological progress are the dominant firm responses to the CCL, while energy efficiency is surprisingly the least responsive component. Our findings underscore the challenge arising from overreliance on narrow energy policy objectives such as energy efficiency improvements, suggesting that a broader policy approach aimed at improving overall firm resource allocation might be more appropriate.

Suggested Citation

  • Morakinyo O. Adetutu & Kayode A. Odusany & Thomas G. Weyman-Jones, 2020. "Carbon Tax and Energy Intensity: Assessing the Channels of Impact using UK Microdata," The Energy Journal, , vol. 41(2), pages 143-166, March.
    • Handle: RePEc:sae:enejou:v:41:y:2020:i:2:p:143-166
    DOI: 10.5547/01956574.41.2.made
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    References listed on IDEAS

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    1. Gale A. Boyd, 2008. "Estimating Plant Level Energy Efficiency with a Stochastic Frontier," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 23-44.
    2. Philippe Aghion & Antoine Dechezleprêtre & David Hémous & Ralf Martin & John Van Reenen, 2016. "Carbon Taxes, Path Dependency, and Directed Technical Change: Evidence from the Auto Industry," Journal of Political Economy, University of Chicago Press, vol. 124(1), pages 1-51.
    3. Morakinyo O. Adetutu, Anthony J. Glass, and Thomas G. Weyman-Jones, 2016. "Economy-wide Estimates of Rebound Effects: Evidence from Panel Data," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    4. H. Wang & B.W. Ang & P. Zhou, 2018. "Decomposing aggregate CO2 emission changes with heterogeneity: An extended production-theoretical approach," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    5. Morakinyo Adetutu & Anthony Glass & Karligash Kenjegalieva & Robin Sickles, 2015. "The effects of efficiency and TFP growth on pollution in Europe: a multistage spatial analysis," Journal of Productivity Analysis, Springer, vol. 43(3), pages 307-326, June.
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    7. Reifschneider, David & Stevenson, Rodney, 1991. "Systematic Departures from the Frontier: A Framework for the Analysis of Firm Inefficiency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 715-723, August.
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