Who Bears the Emission Tax Burden? Evidence from Capital Investments

Abstract

This paper examines who bears the economic burden of environmental taxes by studying investment responses. Using private firms from Spain and the introduction of an emission tax in 2013 in the Autonomous Community Valenciana, we show that the investment response does not depend on the level of pollution but on economic factors. Investments of firms operating in highly competitive markets, firms with low pricing power, and firms with low financial flexibility are the most affected by environmental taxes. In addition, we find that employees bear part of the emission tax burden. Overall, our results indicate that emission taxes affect not only the polluters but also other firms and stakeholders.

Keywords: Environmental taxation, corporate investment

JEL Classification: H22, H23, H32, G31