This study examines how firms respond to a carbon tax. We leverage the introduction of a nationwide carbon tax in Canada in 2019 to conduct a difference-in-differences analysis of carbon emissions of major steel plants globally. We find that firms reduce carbon emissions following the carbon tax. However, the emissions reduction is driven mainly by an (unintended) decrease in asset utilization rather than an (intended) decrease in emissions intensity of production. Multinational enterprises achieve greater emissions reduction than do local firms, as the former engage in cross-border institutional arbitrage by increasing the asset utilization of dirty plants located in pollution havens. These findings highlight the unintended consequences of carbon taxes on firm behavior, raising the need to investigate the global impact of local environmental regulations.
