Do Carbon Taxes Affect Economic and Environmental Efficiency? The Case of British Columbia’s Manufacturing Plants

Abstract

This paper evaluates the impact of British Columbia’s carbon tax on manufacturers’ economic and environmental performance in a unified modeling framework that allows for a critical distinction between efficiency, technical change, and total factor productivity as performance measures. In contrast to most papers that examine environmental policy impacts on either the economy or the environment, our approach combines a by-production model within a stochastic frontier framework to evaluate the tax’s impacts on both economic and environmental efficiency. Our findings suggest that a 1.0% increase in the carbon tax improved manufacturers’ efficiency in producing desirable output (real sales of manufactured goods) by 0.5%. In addition, the same 1.0% increase in the carbon tax improved manufacturers’ environmental efficiency for greenhouse gas (GHGs) and carbon monoxide (CO) emissions by the same amount, 0.2%. However, the carbon tax led to lower environmental efficiency for emissions of nitrogen oxides (NOX), −0.3%. In addition, our use of a rich plant-level dataset reveals considerable heterogeneity in manufacturers’ efficiency responses to the tax. Finally, we suggest that lower efficiency levels for undesirable outputs than desirable outputs indicate that the relative cost of adjusting production processes to improve efficiency favors economic efficiency over environmental efficiency.