Taxing air pollutants and carbon individually or jointly: results from a CGE model enriched by an emission abatement sector

We analyse the separate and collective impacts of emissions taxation to understand the internalisation effects of externalities. The analysis is carried out using a static computable general equilibrium model, with unemployment, bottom-up abatement technologies represented by a step function, and detailed emission coefficients. Environmental and health external costs are quantified using the ExternE’s Impact Pathway Approach. Emissions, as a result of environmental taxation, fall through reduced output, production factor substitution, and increased end of pipe abatement activity. The analysis shows that a full internalisation of environmental externalities can result in modest overall economic and environmental welfare gains. There are, however, differences in terms of employment and output, depending on what combination of taxes are applied, which sectors are covered, and how fiscal revenues are redistributed. Air quality benefits range from €35–75 per ton of CO2 abated. Total environmental benefits always exceed GDP loss and the associated welfare loss.