Network and general equilibrium effects of carbon taxes and deforestation

We develop a multi-sector general equilibrium model, with intersectorial input–output linkages and CO2 emissions, to investigate the economic impacts of the implementation of a carbon taxation policy in an economy permeated by preexisting distorting taxes. The model is calibrated to Brazil and the carbon price is set so that the economy meets its annual global greenhouse gases emissions pledge for 2030 based on the Paris Agreement. In the presence of production networks, the initially concentrated tax shocks propagate throughout the economy, provoking widespread relative input price variations. Depending on the deforestation scenario, GDP losses range between 5.71% and 0.25%, the latter corresponding to the record low deforestation levels of 2012. Sectors are heterogeneously affected. As expected, those sectors more reliant on taxed pollutant resources (e.g., Energy and Transport) suffer sizable decreases in production. But a significant part of the impacts on sectorial production comes indirectly through network effects, even in the absence of new taxes levied on the sector’s product or its direct inputs. When Agriculture & Livestock are also taxed, GDP losses are considerably smaller.