Carbon Taxes and Emission Trading Systems: Which One is More Effective in Reducing Carbon Emissions? —A Meta-Analysis

Abstract

The effectiveness of carbon-pricing policies, particularly carbon taxes and emissions-trading systems (ETSs), in reducing carbon emissions remains a subject of debate, and the empirical evidence is mixed. To address this issue, we conduct a meta-analysis to assess and compare the effectiveness of these two types of policies based on 81 studies conducted from 2011 to 2022. Our analysis shows that both carbon taxes and ETSs have a reduction effect on carbon emissions but that the effect of the former is stronger than the latter. These findings are consistent across the models and samples in the studies. We then document the heterogeneity of the effects of these policies and find that country-level characteristics, such as financial development and GDP growth rates, can enhance the effectiveness of either carbon taxes or ETSs. Furthermore, the reduction effect of carbon taxes is strongest in Asia (excluding Japan) while that of ETSs is strongest in the United States. We also find that carbon taxes and ETSs are particularly effective in reducing carbon emissions in carbon dioxide-intensive industries and emissions from fossil fuels. Overall, our study highlights the effectiveness of carbon-pricing policies to address the environmental challenges associated with climate change and facilitate the achievement of sustainable development goals for carbon neutrality.

Keywords: Carbon taxes, Emissions trading schemes, Carbon Emissions, Meta-analysis