Carbon dioxide (CO2) emissions generated from the combustion of fossil fuels beginning with the onset of the industrial revolution have slowly but steadily increased ambient levels of CO2 in the Earth’s atmosphere. One of many policy tools available for mitigating CO2 emissions from the burning of fossil fuels is to implement a positive price on CO2 emissions. Carbon pricing is achieved by either assessing a direct tax on carbon-based fuels or by requiring emitters to purchase carbon allowances at government managed market prices (the “cap and trade” policy). Over 50 countries began implementing one of these carbon pricing methods about ten years ago.

I exploit variations in both carbon prices and CO2 emission quantities across countries and across time to estimate the effect, if any, a carbon price has on annual CO2 emissions. Annual data on carbon emissions and carbon price representing each country in the world are obtained for the years 1990 to 2019 (purposely avoiding 2020 data). Control variables include indicators for each country’s economy such as annual GDP and the size of government. Control variables also include demographic characteristics such as educational attainment, gender composition, the percentage of the population living in urban settings, and the age of the population. Other control variables include total reserves of each fossil fuel within each country and year, the average wind speed, the degrees latitude, and average summer and winter temperatures for each country. The panel data allows for the control of unobserved factors within each country that do not change much over time such as the culture, political ideology, and environmental preferences of the people in each country.

Results suggest a carbon price significantly reduces carbon emissions within a country. But a three-year time lag is estimated before any price effect emerges. The presence of this estimated lag could matter to the formation of climate policy across the world. Policy makers interested in immediate benefits from carbon policy may look elsewhere, such as command and control measures or technology subsidies, to mitigate carbon emissions rather than wait for three years for a carbon price to show benefits.