Testing for causality between climate policies and carbon emissions reduction

Abstract

In this paper, we evaluate the causal effects of climate policies on carbon emissions reduction. Specifically, we investigate the properties of the Granger causality test in the frequency domain, assuming that the dependent variables include a binary variable and a continuous variable (resp. treatment and outcome variables). Monte Carlo simulations confirm that: (i) this test is valid under this assumption; and (ii) it has more power than its time-domain counterpart. Then, using Sweden as a case study, we evaluate the impact of the Kyoto Protocol, the Swedish carbon tax, and the European Union Emissions Trading System (EU ETS) on carbon emissions reduction over the period 1964–2021. Our empirical results indicate that only the carbon tax Granger causes carbon emissions reduction in the long run. Our methodological framework offers policymakers a useful toolbox for climate policy evaluation as well as new insights into the outcomes of international treaties and carbon pricing policies.