Policy Instruments Against Climate Change: A Panel Data Analysis of Carbon Taxation and Emissions Trading in OECD Countries

What the paper says

Since the Industrial Revolution, the increase in greenhouse gas emissions has led to a significant rise in global temperatures compared to the pre-industrial period. This development has heightened the importance of carbon pricing policies in combating climate change. This study aims to examine the effects of carbon pricing instruments, carbon taxes and emissions trading systems (ETS) on carbon dioxide (CO2) emissions in OECD countries. A panel data analysis covering the period 2002–2023 was conducted, taking into account structural differences across countries as well as shared economic dynamics. The findings indicate that both carbon taxes and ETS mechanisms are effective in reducing CO2 emissions in the long run. Moreover, while increased industrial activity contributes to higher emissions, a greater share of renewable and nuclear sources in the energy mix is found to support emission reduction. The study demonstrates that carbon pricing policies exert limited short-term effects but generate structural and lasting impacts in the long term. The findings are consistent with the existing literature and theoretical framework. Achieving permanent reductions in emissions requires a comprehensive policy approach that not only implements carbon pricing, but also strengthens energy efficiency and fuel substitution in the industrial sector while continuously increasing the share of clean sources in the energy supply. The analysis shows that carbon taxes and emissions trading systems (ETS) are effective in reducing emissions over the long run in OECD countries, and that their success varies depending on countries’ energy profiles and policy designs. These results underline that a well-designed and complementary carbon pricing framework is critical for achieving a sustainable transition.