Carbon Pricing and Investment

James R. Brown, Gustav Martinsson, Per Strömberg, Christian Thomann

How does carbon pricing affect firms’ investment decisions? We study this question using unique data on capital investment and the firm-specific cost of emitting CO2 for the Swedish manufacturing sector over the course of two decades. We document a positive connection between the price of carbon and firm investment spending. For firms in the most carbon-intensive sectors, a 10% increase in carbon pricing leads to a 2% increase in investment spending. High-emission firms also increase the share of investments focused specifically on abatement as well as green R&D in response to carbon pricing. Our results imply that pricing CO2 emissions at a sufficiently high level incentivizes brown firms to make green investments.