Energy Policy and Carbon Emission in Russia: A Short Run CGE Analysis

In this study we investigate the economic effects of carbon taxes on the Russian economy. The main findings of this study are the following: an introduction of carbon taxes compensated by an increase in lump-sum subsidies may weak the Russian economy through higher energy costs. Moreover, such an environmental tax reform could induce Dutch disease in Russia because of increases in the domestic production of crude oil. Exports of crude oil, petroleum products, natural gas, and minerals increases, thereby increasing revenues from export taxes, whereas revenues from all other taxes decrease. In contrast, an introduction of carbon taxes compensated by a reduction of taxes on labour results in an increase in domestic production of most non-energy producing sectors, which implies increases in real GDP and household expenditures. The shift in the economic structure towards non-energy producing sectors is more pronounced under carbon taxation which is compensated by a reduction in labour taxes. Moreover, such an environmental tax reform can induce a double dividend. However, the results strongly depend on the labour supply elasticity as well as elasticities of substitution between labour and the capital-energy aggregate. For instance, a higher labour supply elasticity implies a lower increase in labour costs. Moreover, higher elasticities of substitution between labour and the capital-energy aggregate encourage a shift of the tax burden from labour to capital. Finally, carbon taxation in Russia may induce a strong carbon leakage in other countries due, in particular, to a strong increase in the export supply of natural gas and petroleum products.