EVALUATING THE DUAL ROLE OF CARBON PRICING IN ENVIRONMENTAL PERFORMANCE AND INNOVATION OF CANADIAN PROVINCES USING A DIFFERENCE-IN-DIFFERENCES ANALYSIS

Abstract

Carbon taxation or other policies aiming at the mitigation of climate change become more critical in the promotion of sustainable environmental and economic results. This paper uses a panel dataset of 102 Canadian firms over the period between 2010 and 2023 sample and estimates the effect of carbon taxation on carbon emissions at the firm level and total factor productivity (TFP) using a method of difference-in-differences (DiD) estimation. The findings confirm the Porter Hypothesis which proposes that emissions can be largely reduced through the carbon tax by an estimated 0.8 units along with a 0.22 increase in the TFP which indicates that carbon tax can spur environmentally friendly efficiency in production. We found that factor intensities, such as firm size and capital intensity has a major impact on these effects. The results suggest that carbon taxation is a powerful instrument to lower environment externality without undermining, and possibly increasing, firm competitiveness. The advice to the policymakers is stated to shape carbon tax measures and pre-incentives on innovation to continue economic development with respect to climate goals.