Misum Working Paper Series,
Stockholm School of Economics, Mistra Center for Sustainable Markets (Misum)

Abstract: Decreasing greenhouse gas emissions from electricity generation is crucial to tackle climate change. Empirically, however, little is known about the effectiveness of existing economic instruments in the power sector. This paper examines the impact of the UK Carbon Price Support (CPS), a carbon tax implemented in the UK power sector in 2013. Relative to a synthetic control unit built from other European countries, I find that emissions from the UK power sector declined by 20 to 26 percent per year on average between 2013 and 2017. The tax operated via three mechanisms: a decrease in emissions at the intensive margin; the closure of some high-emission plants at the extensive margin; and a higher probability of closure for plants already at risk due to European air quality regulations.

Keywords: carbon tax; electricity generation; synthetic control method

JEL-codes: D22; H23; Q41; Q48

34 pages, October 26, 2021

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