Using energy and emissions taxation to finance labor tax reductions in a multi-sector economy: An assessment with EMuSe

In this paper, we introduce a closed-economy version of the dynamicenvironmental multi-sector general equilibrium modelEMuSeto analyze the effects of financing a labor tax reduction through higher consumption, energy or emissions taxation.We find that, for sufficiently high environmental damage, using energy and emission taxes as the financing instrument eventually outperforms the use of consumption taxes due to a positive productivity-like shock. However, it takes time for the positive effects to materialize. Manufacturing, transportation and energy production sectors tend to lose (or gain only a little) while administration, services and research sectors tend to benefit from the implementation of an environmental taxation as a financing instrument. As demand shifts towards sectors less affected by the tax shift, the aggregate economic effects are different in the multi-sector economy compared to a conventional one-sector-economy framework.