Charging companies for their carbon emissions can accidentally backfire and lead to more pollution instead of less.
April 13, 2026
Original Paper
When Carbon Pricing Backfires: Market Composition Effects
SSRN · 6560408
The Takeaway
When carbon taxes make 'clean' products more expensive, consumers often switch to cheaper, dirtier alternatives that didn't see the same price hike. This market shift can lead to a net increase in total emissions, defeating the entire purpose of the policy.
From the abstract
Carbon pricing aims to reduce emissions by contracting demand and inducing cleaner production. This paper shows that carbon pricing can backfire in markets with differentiated products and heterogeneous abatement technologies. When firms differ in baseline emissions and abatement responsiveness, a carbon price generates asymmetric pass-through that can raise the relative prices of cleaner products. Consumers then substitute toward products with slower price increases that remain more emissionint