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Carbon tax recycling: Fostering reindustrialization in financialized developing economies

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  • Magacho, Guilherme
  • Godin, Antoine
  • Spinola, Danilo
  • Yilmaz, Devrim

Abstract

Including developing countries in the low-carbon transition is essential for meeting climate goals, yet their structural specificities are often ignored in transition models. This article presents a Structural Stock-Flow Consistent (SFC) model for open developing economies, dividing production into resource-based exports, non-tradable goods and services, and other tradable sectors. While SFC models highlight financial constraints, they rarely adopt a multi-sectoral perspective. Our model contributes by (1) providing a flexible framework that accommodates diverse country characteristics, balancing short-term demand with long-term structural strategies, and (2) demonstrating the limitations of carbon pricing alone in economies dependent on carbon-intensive sectors. By integrating structurally distinct sectors within a monetary framework, we reveal how financial constraints stemming from structural rigidities shape transition dynamics. Our results indicate that carbon pricing’s effectiveness depends on tax revenue recycling to avert recessions and support sustainable decarbonization. This requires fostering innovation and competitiveness in low-emission industries.

Suggested Citation

  • Magacho, Guilherme & Godin, Antoine & Spinola, Danilo & Yilmaz, Devrim, 2026. "Carbon tax recycling: Fostering reindustrialization in financialized developing economies," Structural Change and Economic Dynamics, Elsevier, vol. 77(C), pages 1-22.
    • Handle: RePEc:eee:streco:v:77:y:2026:i:c:p:1-22
    DOI: 10.1016/j.strueco.2025.12.008
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    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • F18 - International Economics - - Trade - - - Trade and Environment
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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