How effective are emission taxes in reducing air pollution? A satellite-based case study for Spain

Air pollution poses significant risks to public health and the environment. Policymakers aim to counteract these risks by implementing policies to reduce pollution and emissions. Emission taxes are a prominent market-based tool. However, their real-world effectiveness remains underexplored. This study evaluates the impact of an economically significant tax on nitrogen oxide (NOx) introduced in the Comunidad Valenciana in 2013 compared to the rest of Spain using a difference-in-differences framework. To measure the area-wide spatiotemporal changes in air pollution, the study leverages satellite-based NO₂ data. The findings reveal that the emission tax achieved a modest 1.2 % decline in NO₂ levels annually, equivalent to approximately 728 tons of NOx emissions. In a series of robustness tests, heterogeneity analysis highlights stronger reductions in industrial areas, innovative firms, and larger companies, emphasizing the role of technological capacity. In contrast, firms with significant market power tend to shift the tax burden to stakeholders instead, thereby reducing its environmental impact. These results suggest that emission taxes have an effect in the intended direction; however, the effect alone does not significantly curb NO₂ pollution. Complementary measures, such as innovation incentives and stricter regulatory standards, are necessary to enhance their effectiveness. By providing granular evidence of emission taxes’ real-world impacts, this study offers valuable insights for policymakers designing targeted and efficient environmental policies.