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Under what conditions does a carbon tax on fossil fuels stimulate biofuels ?

Author

Listed:
  • Timilsina, Govinda R.
  • Csordas, Stefan
  • Mevel, Simon

Abstract

A carbon tax is an efficient economic instrument to reduce emissions of carbon dioxide released from fossil fuel burning. Its impacts on production of renewable energy depend on how it is designed -- particularly in the context of the penetration of biofuels into the energy supply mix for road transportation. Using a multi-sector, multi-country computable general equilibrium model, this study shows first that a carbon tax with the entire tax revenue recycled to households through a lump-sum transfer does not stimulate biofuel production significantly, even at relatively high tax rates. This reflects the high cost of carbon dioxide abatement through biofuels substitution, relative to other energy substitution alternatives; in addition, the carbon tax will have negative economy-wide consequences that reduce total demand for all fuels. A combined carbon tax and biofuel subsidy policy, where part of the carbon tax revenue is used to finance a biofuel subsidy, would significantly stimulate market penetration of biofuels. Although the carbon tax and biofuel subsidy policy would cause higher loss in global economic output compared with the carbon tax with lump sum revenue redistribution, the incremental output loss is relatively small.

Suggested Citation

  • Timilsina, Govinda R. & Csordas, Stefan & Mevel, Simon, 2011. "Under what conditions does a carbon tax on fossil fuels stimulate biofuels ?," Policy Research Working Paper Series 5678, The World Bank.
  • Handle: RePEc:wbk:wbrwps:5678
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    Cited by:

    1. Khatiwada, Dilip & Leduc, Sylvain & Silveira, Semida & McCallum, Ian, 2016. "Optimizing ethanol and bioelectricity production in sugarcane biorefineries in Brazil," Renewable Energy, Elsevier, vol. 85(C), pages 371-386.
    2. Doumax, Virginie & Philip, Jean-Marc & Sarasa, Cristina, 2014. "Biofuels, tax policies and oil prices in France: Insights from a dynamic CGE model," Energy Policy, Elsevier, vol. 66(C), pages 603-614.
    3. Annageldy Arazmuradov, 2016. "Economic prospect on carbon emissions in Commonwealth of Independent States," Economic Change and Restructuring, Springer, vol. 49(4), pages 395-427, November.
    4. repec:eee:energy:v:135:y:2017:i:c:p:726-739 is not listed on IDEAS

    More about this item

    Keywords

    Climate Change Mitigation and Green House Gases; Transport Economics Policy&Planning; Taxation&Subsidies; Environment and Energy Efficiency; Energy and Environment;

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