Carbon tax under the Clean Development Mechanism: a unique approach for reducing greenhouse gas emissions in developing countries

Abstract

This study examines the economic and environmental implications of a unique Clean Development Mechanism (CDM) scheme in which a non-Annex B country (Thailand) introduces a carbon tax and exports the resulting emission mitigation as certified emission reductions (CERs). A general equilibrium model for Thailand has been developed for analysing this carbon tax-cum-CDM (CT-CDM) policy. The study finds that, unlike a carbon tax policy, the CT-CDM policy could increase economic welfare in Thailand, depending on CER price and schemes of recycling carbon tax- and CERrevenue to the economy. The CT-CDM policy is found to increase economic welfare at a very low CER price (<US$2/tCO2) if the revenue from the carbon tax and CER exports is recycled to finance cuts in existing indirect taxes on nonenergy goods. The policy would also improve economic welfare when the revenue is recycled to households through a lump-sum transfer or when it is used to finance cuts in existing labour tax, but only at a relatively high CER price (i.e. >US$55/tCO2).