What is it going to take to achieve 2020 Emission Targets? Marginal abatement cost curves and the budgetary impact of CO2 taxation in Portugal (

The objective of this paper is to study CO2 taxation in its dual role as a climate and fiscal policy instrument. It develops marginal abatement cost curves for CO2 emissions using a dynamic general equilibrium model of the Portuguese economy which highlights the mechanisms of endogenous growth and includes a detailed modeling of the public sector. It also considers complementary cost curves corresponding to the impact of CO2 taxes on GDP and on the public budget. Simulation results show that a tax of 17.00 Euros per tCO2 has the capacity to limit emissions to 62.6 Mt CO2 in 2020, consistent with the existing climate policy target for Portugal. In turn, changes in tax revenues, together with reductions in public spending, lead to a 2.7% decline in public debt. These desirable outcomes come at the cost of a 0.7% reduction in GDP. In general, stricter emission targets imply greater equilibrium CO2 tax levels and larger GDP losses, although these are accompanied by greater reductions in public debt. Finally, the paper highlights the importance of public spending behavior for projecting the impact of CO2 taxes on public revenues and the public account and designing policies to promote fiscal consolidation.