The influence of the fossil fuel and emission‐intensive industries on the stringency of mitigation policies: Evidence from the OECD countries and Brazil, Russia, India, Indonesia, China and South Africa

Abstract

AbstractThe article assesses the effects of different industrial sectors on the design of market‐based policies that mitigate climate change. It claims that the emission‐intensive and fossil fuel industries, especially those exposed to trade, have a negative impact on the stringency of domestic market‐based mitigation policies, namely, carbon taxes and Emission Trading Systems (ETS). To address endogeneity between industrial and policy outputs, the empirical analysis resorts to a nontraditional instrumental variable method constructing instruments with heteroskedastic errors in the data. With a dataset that covers 34 countries from 1990 to 2015, the analysis shows that there is a negative and statistically significant association between these industries and policy stringency, albeit in a differentiated way. Whereas the upstream fossil fuel industries have a negative relationship with carbon taxes, the power industry was only negatively associated with ETS. Emission‐intensive manufacturers and the downstream fossil fuels industry have a negative effect on both policies. The design and practical applications of each policy explain the disparities; although ETS regulate larger emission‐intensive installations such as power plants, carbon taxes tend to impose tariffs on activities that are not necessarily emission‐intensive, such as oil extraction or specific fuels. The results, robust to different estimation methods, support that larger industrial outputs are significantly associated with less stringent mitigation policies.