Is it time for a revival of ETR in Italy? Energy elasticities and factor substitutability for manufacturing firms

Environmental Tax Reforms (ETRs) have recently enjoyed renewed widespread attention as a tool aimed at GHG emission abatement. Indeed energy taxation as a market-based instrument for environmental policy can perform an important role if proved to be effective. In this paper the efficacy of energy-related taxes in relation to Italian firms’ behaviour is analyzed. A translog model is used to estimate factor demands for a panel of industrial firms divided between small-medium and large enterprises. Our analysis estimates large and negative own price elasticities for energy. As for other inputs, we find complementarity between energy and capital and substitutability between energy and labour for small firms therefore a double dividend effect could take place if ETR is implemented.