Impact of carbon taxation under fiscal reforms: A computable general equilibrium analysis for the Pakistan economy

In Pakistan, implementing the long overdue fiscal reforms such as indirect tax rationalization and subsidies removal can not only generate substantial government revenue but also reduce energy consumption and pollutant emissions. The intended outcomes of environmental reforms–reducing local pollutants or GHG emissions–can therefore be achieved at relatively low costs if such policies are complemented with comprehensive fiscal overhauling of the economy. This study aimed to assess the economic and environmental implications of these policies under different scenarios using a recursive dynamic computable general equilibrium modeling approach. The main findings of the study reveal that both tax rationalization and subsidies removal policies will lead to reduced energy consumption and pollutant emissions while positively impacting GDP. In the combined scenarios where a carbon tax is imposed in conjunction with fiscal reforms, the energy sector will bear the greatest impact due to the upward adjustment of various energy product prices under all the policies considered. Moreover, the relative impact of reducing energy use and GHG emissions per unit of GDP loss will be greater under the combined carbon tax and fiscal policies scenarios than under the independent carbon tax scenario.