A macroeconomic evaluation of a carbon tax in overseas territories: A CGE model for Reunion Island

Abstract

Reunion Island, similar to most insular regions, is ruled by a carbon-based economy that is heavily dependent on fossil fuels. In recent years, the energy transition towards a low-carbon economy has become the watchword of this French overseas region, with the objective of a 100% renewable energy mix by 2030. Reducing fossil fuel use while maintaining economic growth is an important issue for all countries but is even more important for island territories with structural and geographical handicaps. Energy transition and drastic greenhouse gas emission reductions represent costs and opportunities that need to be quantified. This research paper assesses the environmental and macroeconomic effects of the carbon price policy introduced in France to meet the target of the Paris Agreement. The acceptability of the tax significantly depends on the possibility of recycling tax revenues. Different schemes for recycling tax revenues are considered in simulations. The methodology used is a computable general equilibrium (CGE) model for Reunion Island (GetRun-NRJ) that takes into account all island specificities. The results show that the carbon tax enables substitutions between fossil and renewable energy production and reduces CO2 emissions. However, the tax has negative effects on the aggregate economy. The implemented tax revenue recycling compensation mechanisms mitigate the negative impacts, but the results differ significantly, as the recycling schemes do not support the same economic actors.