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The effect of a carbon tax rise on Iceland’s economy

Author

Listed:
  • Hansjörg Blöchliger
  • Sigurdur Johannesson
  • Marias Halldor Gestsson

Abstract

This paper studies the potential impact of higher carbon taxation - to reach the government’s emission targets by 2030 - on Iceland’s economy. The paper is divided into two parts. First, a DSGE modelling exercise suggests that the equivalent of an oil price hike of between 30% and 55% is needed to reach the 2030 target, implying a GDP decline of between 0.3% and 0.6% by 2030. The impact on inflation would be very small. Second, a panel regression for the fishing industry reveals that a 40-50% oil price hike would be sufficient to reduce the entire fishing fleet’s emissions by 10%, raising total factor costs for the fishing companies by 4-5%. Such a cost hike would hardly threaten the competitiveness of the fishing industry. Both approaches assume that a carbon tax rise would have no effect on production technology.

Suggested Citation

  • Hansjörg Blöchliger & Sigurdur Johannesson & Marias Halldor Gestsson, 2022. "The effect of a carbon tax rise on Iceland’s economy," OECD Economics Department Working Papers 1708, OECD Publishing.
    • Handle: RePEc:oec:ecoaaa:1708-en
    DOI: 10.1787/76a7eaed-en
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    Cited by:

    1. Kazeem Alasinrin Babatunde & Moamin A. Mahmoud & Nazrita Ibrahim & Fathin Faizah Said, 2023. "Malaysia’s Electricity Decarbonisation Pathways: Exploring the Role of Renewable Energy Policies Using Agent-Based Modelling," Energies, MDPI, vol. 16(4), pages 1-15, February.

    More about this item

    Keywords

    carbon tax; DSGE modelling; environmental economics; fisheries; Iceland;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q22 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Fishery

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