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Fiscal limits on first-best climate policy: A CGE analysis for Europe

  • Richard Tol

    ()

    (Department of Economics, University of Sussex
    Institute for Environmental Studies, Vrije Universiteit, Amsterdam, The Netherlands
    Department of Spatial Economics, Vrije Universiteit, Amsterdam, The Netherlands)

  • Stefano F Verde

    (Climate Policy Research Unit, European University Institute, Florence, Italy)

We use a standard computable general equilibrium model to explore the fiscal implications of stringent carbon dioxide emission reduction in Europe. Both the immediate targets (20-30% by 2020) and the medium-term targets (80-90% by 2050) for abatement can be met with a carbon tax that is modest to sizeable. Imposing budget neutrality, a carbon tax that would allow all other taxes to fall by 5% (20%) would cut emissions by about 40% (80%). For 80% emission reduction, the carbon tax would only be the third largest tax in terms of revenue. A 40% emission reduction would cost about 1.5% of GDP. Costs are roughly exponential in abatement. The economic impact of emission reduction is minimized if the carbon tax revenue is preferentially used to reduce taxes on intermediates and import tariffs; such taxes, however, bring in little revenue at present. Emission reduction in Europe affects trade patterns across the world. It hampers the economies of West Asia and Africa, but has stimulating effect elsewhere. Economies everywhere outside Europe become more carbon-intensive. About one in four of emissions avoided in Europe are emitted elsewhere.

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Paper provided by Department of Economics, University of Sussex in its series Working Paper Series with number 5813.

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Date of creation: Feb 2013
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Handle: RePEc:sus:susewp:5813
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  1. Parry, Ian W. H. & Williams, Roberton III & Goulder, Lawrence H., 1999. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Journal of Environmental Economics and Management, Elsevier, vol. 37(1), pages 52-84, January.
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  9. Kuik, Onno & Brander, Luke & Tol, Richard S.J., 2009. "Marginal abatement costs of greenhouse gas emissions: A meta-analysis," Energy Policy, Elsevier, vol. 37(4), pages 1395-1403, April.
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  11. Goulder Lawrence H., 1995. "Effects of Carbon Taxes in an Economy with Prior Tax Distortions: An Intertemporal General Equilibrium Analysis," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages 271-297, November.
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