Investigating the effects of carbon tax and emissions trading on greenhouse gas emissions reduction: Evidence from a global analysis

Abstract

Carbon pricing mechanisms are central policy instruments for climate mitigation. This study assesses the comparative environmental effectiveness of carbon tax (CT) and emissions trading system (ETS), using a panel dataset of 74 countries over the period 2010–2022 under a fixed-effects estimation framework. We found that when effective policy intensity was measured using both price levels and sectoral scope, CT and ETS achieved statistically equivalent emission reductions: a US$10 per tCO 2 e increase in coverage-adjusted carbon price reduced per-capita GHG emissions by approximately 1.31%. This equivalence was obscured when nominal prices were used, as CT performed better than ETS in most specifications; however, this effectiveness attenuated significantly with the inclusion of year fixed effects, indicating that observed emission reductions in CT-adopting countries partly reflected global trends rather than the tax itself. ETS coefficients remained robust across specifications, reflecting stronger identification from idiosyncratic market-driven price variation. Dynamic analysis revealed that CT induced delayed but durable emission reductions, consistent with gradual structural adjustments, while ETS produced more immediate responses. The findings suggest that policymakers should prioritize coverage expansion and adequate price levels for effective policy intensity, adapt policy design to institutional capacity, and complement carbon pricing with renewable energy deployment.