Emission Taxes and Capital Investments: The Role of Tax Incidence

This paper examines investment responses to emission taxes and the role of tax incidence in passing on tax burdens. Using private firms from Spain and the introduction of an emission tax in 2013 in the Autonomous Community Valenciana, we show that investments decline in response to the emission tax. Importantly, this investment decline does not depend on the level of pollution but on economic factors related to tax incidence. Investments in firms operating in highly competitive markets, firms with low pricing power, and firms with low financial flexibility are the most affected by environmental taxes. We generalize the investment findings using the introduction of carbon taxes in France and Ireland in a stacked difference-in-differences design. Overall, our results indicate that emission taxes affect not only polluters but also other firms and stakeholders such as suppliers, customers, and consumers depending on the relative elasticities of supply and demand.

Keywords: Environmental taxation, corporate investment

JEL Classification: H22, H23, H32, G31

Suggested Citation: Suggested Citation

Jacob, Martin and Zerwer, Kira, Emission Taxes and Capital Investments: The Role of Tax Incidence (February 10, 2024). The Accounting Review, Forthcoming, TRR 266 Accounting for Transparency Working Paper Series No. 83, Available at SSRN: https://ssrn.com/abstract=4094069 or http://dx.doi.org/10.2139/ssrn.4094069