Environmental policy stringency and CO2 emissions
Evidence from cross-country sector-level data
This paper provides empirical evidence on the short and long-term sectoral effect
of environmental policy stringency on CO2 emissions, exploiting longitudinal data
covering 30 OECD countries and more than 50 sectors. The analysis relies on the OECD
Environmental Policy Stringency (EPS) index, a composite index tracking climate change
and air pollution mitigation policies. Estimates obtained from panel regressions suggest
that more stringent environmental policies are associated with lower emissions, that
the effect builds over time and differs across sectors depending on their fossil fuel
intensity. A one unit increase in the EPS index (about one standard deviation), is
associated with 4% lower CO2 emissions in the sector with median fossil fuel intensity
after two years and by 12% after 10 years. For sectors in the top decile of the fossil
fuel intensity distribution, the estimates point to a decline in emissions by 11%
after two years and 19% after ten years. Environmental policies targeted at energy,
manufacturing and transport sectors have the largest potential impact on emissions.
Illustrative policy scenarios based on these results indicate that achieving emission
reductions consistent with net-zero targets will require raising the stringency of
environmental policies more drastically and rapidly than in the past.
Published on November 06, 2023
In series:OECD Economics Department Working Papersview more titles