A Global Carbon Tax on Climate Change: Policy Implications for Latin America

This study measures the impact of curbing carbon dioxide (CO2), primary source of climate change. It applies a newly developed dynamic general equilibrium energy model with a focus on Latin America and the Caribbean, built in a multi-stage nested production structure to accommodate energy-related substitutions among energy sources and with other factors of production at different stages. The model incorporates an energy module, which estimates the sectoral CO2 emission coefficients for energy sources and the aggregate CO2 emissions for each country and region. The model is built on 2007 base year and the time path over 2025. The simulation results confirm several stylized outcomes based on global initiatives. In order to reduce the global CO2 emissions, the key is the participation of large emitters in developing countries. With the global carbon taxes, China alone accounts for roughly the half of the global reduction of CO2 emissions, whereas OECD countries altogether contribute around 15 percent and the region by 2.5 percent. Carbon tax generates the global negative welfare effects. In the region, energy exporting countries are likely to incur greater adverse effects due to two factors: (i) deterioration of terms of trade; and (ii) large export-output ratio and sectoral composition of energy sectors. Among industries, the energy sectors are clear losers. On trade front, the simulation results reveal dynamic interactions and response between countries and among sectors in the global market. The region is expected to penetrate its exports largely of manufactured products to OECD countries, to which China loses. It is also shown that even being excluded from the global commitment, the region cannot be immune from the adverse effects, as it is strongly linked in the global market through trade.