Does carbon pricing policy improve energy efficiency? New evidence from Canadian provinces

Abstract

ABSTRACT Given the increasing damage effect of climate change, the Canadian government has taken a further step to ensure that carbon pricing is implemented in all provinces to reduce its GHGs emissions as a means of addressing climate change. Thus, this paper examines the effect of carbon pricing on energy consumption which is the main source of CO2 emission to enhance our understanding beyond carbon-pricing effects on households and revenue recycling in the prior research. Our study analyzes the energy efficiency of Canada using the province-level data between 2000 and 2021, by developing an SFA production model to understand the drivers of energy consumption and then compute the total factor energy efficiency index while controlling for the role of carbon pricing. Our empirical results reveal that increased labor input, as well as output, mitigate the rising capital-induced energy consumption, while carbon pricing policy plays no significant role in influencing energy consumption. However, the effectiveness of carbon pricing is found in reducing province-level energy efficiency. This striking evidence suggests that policymakers should consider a labor-oriented energy saving scheme and conduct a comprehensive review of the current carbon pricing policy in order to align with energy efficiency interventions toward the achievement of Canada’s Paris Agreement targets.