Economic and environmental effects of CO2 taxation: an input-output analysis for Spain

Abstract

The aim of this work is to investigate the direct and indirect effects of an environmental tax on Spanish products, based on their CO2 emission intensities. For this purpose, we apply environmental input-output (EIO) and price models. The short-term price effects of the introduction of tax on consumption prices, and its influence on consumers’ welfare, are determined. We also quantify the environmental impacts of such taxation in terms of the reduction in CO2 emissions. The results, based on the Spanish economy for the year 2007, show that sectors with a relatively poor environmental profile are subjected to high environmental tax rates. As a consequence, applying a CO2 tax on these sectors increases production prices and induces a slight increase in the Consumer Price Index, and a decrease in private welfare. In general, our analysis highlights that the environmental and economic goals cannot both be met at the same time with the environmental taxation, unless there is a way in which the public revenues could be used to compensate those who are negatively affected by the tax.