A CGE Analysis of the Macroeconomic Effects of Carbon Dioxide Emission Reduction on the Algerian Economy

Abstract

This study analyzes the macroeconomic effects of limiting carbon emissions using computable general equilibrium (CGE) model in the Algerian economy. Doing so, we developed an environmental computable general equilibrium model and investigate carbon tax policy responses in the economy applying exogenously different degrees of carbon tax into the model. Three simulations were carried out using an Algerian social accounting matrix. The carbon tax policy illustrates that a 1.52 % reduction of carbon emission reduces the nominal GDP by 1.26 % and exports by 3.04 %; a 2.67 % reduction of carbon emission reduces the nominal GDP by 1.92 % and exports by 4.86 %; and a 3.72 % reduction of carbon emission reduces the nominal GDP by 3.79 % and exports by 6.90 %. Imposition of successively higher carbon tax results in increased government revenue from the baseline by 23.68, 50.18, and 76.38 %, respectively. However, fixed capital investment increased in scenario 1a (first) by 0.23 % but decreased in scenarios 1b (second) and 1c (third) by 0.35 and 2.03 %, respectively, from the baseline. According to our findings, policy makers should consider initial (first) carbon tax policy. This policy results in achieving reasonably good environmental impacts without losing the investment, fixed capital investment, investment share of nominal GDP, and government revenue.