Primed by the ongoing political and academic debate about decarbonization, we empirically study how firms respond to the introduction of a gradually increasing carbon tax. The Swiss context offers a unique opportunity to observe the reaction of firms who were exposed to a carbon tax that increased by 400% between 2008-2015. Using firm-level panel data, we find that the tax leads to significant reductions in energy consumption and carbon emissions by up to 8%. Our results are consistent with an estimated tax elasticity of-0.17 for the consumption of light oil and-0.10 for natural gas. Further, we show that while the industry sector substitutes light oil with natural gas and systematically cuts back on the consumption of oil, firms in the service sector consume less of both fossil fuels without switching to less carbon-intensive energy sources.