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When does a carbon tax on fossil fuels stimulate biofuels?

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  • Timilsina, Govinda R.
  • Csordás, Stefan
  • Mevel, Simon

Abstract

A carbon tax is an efficient economic instrument to reduce emissions of carbon dioxide released from fossil fuel burning. If designed properly, it could also help significantly to promote renewable energy. Using a multi-sector, multi-country computable general equilibrium model this study investigates under what circumstances a carbon tax would help stimulate penetration of biofuels into the energy supply mix for road transportation in various countries and regions around the world. This study shows that a carbon tax cum biofuel subsidy policy, where a carbon tax is introduced to fossil fuels and part of the tax revenue is used to finance the biofuel subsidy, would significantly help stimulate market penetration of biofuels. On the other hand, a carbon tax alone policy, where the entire tax revenue is recycled to households through a lump-sum transfer, does not help stimulate biofuels significantly even at higher tax rates. Although the carbon tax cum subsidy policy would cause higher loss in economic output at the global level as compared to the carbon tax alone policy, the incremental loss is relatively small. The key policy insight drawn from the study is that if a carbon tax were to be implemented in an economy for the purpose of climate change mitigation, recycling part of its revenue to finance biofuel subsidies would significantly help stimulate biofuels.

Suggested Citation

  • Timilsina, Govinda R. & Csordás, Stefan & Mevel, Simon, 2011. "When does a carbon tax on fossil fuels stimulate biofuels?," Ecological Economics, Elsevier, vol. 70(12), pages 2400-2415.
  • Handle: RePEc:eee:ecolec:v:70:y:2011:i:12:p:2400-2415
    DOI: 10.1016/j.ecolecon.2011.07.022
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    References listed on IDEAS

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    Cited by:

    1. Annageldy Arazmuradov, 2016. "Economic prospect on carbon emissions in Commonwealth of Independent States," Economic Change and Restructuring, Springer, vol. 49(4), pages 395-427, November.
    2. Cantono, Simona, 2012. "Unveiling diffusion dynamics: an autocatalytic percolation model of environmental innovation diffusion and the optimal dynamic path of adoption subsidies," Department of Economics and Statistics Cognetti de Martiis LEI & BRICK - Laboratory of Economics of Innovation "Franco Momigliano", Bureau of Research in Innovation, Complexity and Knowledge, Collegio 201222, University of Turin.
    3. Thepkhun, Panida & Limmeechokchai, Bundit & Fujimori, Shinichiro & Masui, Toshihiko & Shrestha, Ram M., 2013. "Thailand's Low-Carbon Scenario 2050: The AIM/CGE analyses of CO2 mitigation measures," Energy Policy, Elsevier, vol. 62(C), pages 561-572.
    4. Anderson, Blake & M'Gonigle, Michael, 2012. "Does ecological economics have a future?," Ecological Economics, Elsevier, vol. 84(C), pages 37-48.
    5. Matsumoto, Ken׳ichi & Andriosopoulos, Kostas, 2016. "Energy security in East Asia under climate mitigation scenarios in the 21st century," Omega, Elsevier, vol. 59(PA), pages 60-71.
    6. Timilsina, Govinda R., 2012. "Economic implications of moving toward global convergence on emission intensities," Policy Research Working Paper Series 6115, The World Bank.
    7. Caurla, Sylvain & Delacote, Philippe & Lecocq, Franck & Barthès, Julien & Barkaoui, Ahmed, 2013. "Combining an inter-sectoral carbon tax with sectoral mitigation policies: Impacts on the French forest sector," Journal of Forest Economics, Elsevier, vol. 19(4), pages 450-461.
    8. Virginie Doumax & Jean-Marc Philip & Cristina Sarasa, 2013. "Biofuels, tax policies and oil price: insights from a dynamic CGE model," EcoMod2013 5417, EcoMod.
    9. Khatiwada, Dilip & Leduc, Sylvain & Silveira, Semida & McCallum, Ian, 2016. "Optimizing ethanol and bioelectricity production in sugarcane biorefineries in Brazil," Renewable Energy, Elsevier, vol. 85(C), pages 371-386.
    10. Alberto Gago & Xavier Labandeira & Xiral López Otero, 2014. "A Panorama on Energy Taxes and Green Tax Reforms," Hacienda Pública Española, IEF, vol. 208(1), pages 145-190, March.
    11. Doumax, Virginie & Philip, Jean-Marc & Sarasa, Cristina, 2014. "Biofuels, tax policies and oil prices in France: Insights from a dynamic CGE model," Energy Policy, Elsevier, vol. 66(C), pages 603-614.
    12. Timilsina, Govinda R. & Landis, Florian, 2014. "Economics of transiting to renewable energy in Morocco : a general equilibrium analysis," Policy Research Working Paper Series 6940, The World Bank.
    13. repec:eee:energy:v:141:y:2017:i:c:p:1998-2012 is not listed on IDEAS
    14. Liu, Yang & Han, Liyan & Yin, Ziqiao & Luo, Kongyi, 2017. "A competitive carbon emissions scheme with hybrid fiscal incentives: The evidence from a taxi industry," Energy Policy, Elsevier, vol. 102(C), pages 414-422.
    15. Tahamina Khanam & Jukka Matero & Blas Mola-Yudego & Lauri Sikanen & Abul Rahman, 2016. "Assessing external factors on substitution of fossil fuel by biofuels: model perspective from the Nordic region," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 21(3), pages 445-460, March.
    16. Qiu, Cheng & Colson, Gregory & Wetzstein, Michael, 2014. "An ethanol blend wall shift is prone to increase petroleum gasoline demand," Energy Economics, Elsevier, vol. 44(C), pages 160-165.
    17. repec:eee:energy:v:135:y:2017:i:c:p:726-739 is not listed on IDEAS
    18. Timilsina, Govinda R., 2013. "How much does an increase in oil prices affect the global economy ? some insights from a general equilibrium analysis," Policy Research Working Paper Series 6515, The World Bank.

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