On the Spillover Effects of CO2 Taxation on the Emissions of other Air Pollutants

Alfredo M Pereira,Rui M Pereira

doi:10.22158/jepf.v7n3p81

Abstract

In this paper, we compare and contrast the environmental, macroeconomic and distributive effects of CO2 taxation with the effects of taxing a variety of air pollutants at their external costs. We do so using a multi-sector and multi-household dynamic computable general equilibrium model of the Portuguese economy. We find that a carbon tax of 114 euros per ton of CO2 is necessary to achieve the IPCC 2030 targets. It does so, however, at a high macroeconomic and distributional cost. In turn, the macroeconomic and distributional effects of taxing different pollutants at their external costs in line both qualitatively and quantitatively with the effects of the CO2 taxation. In absolute terms, however, better environmental results in terms of GHG and air pollutants emissions are achieved through the level of CO2 taxation necessary to achieve the IPCC targets than through direct taxation of such emissions at their external costs. Ultimately, the benefits of complementing the CO2 taxation with the taxation of other air pollutants at their external costs does not seem significant from either efficiency, fairness, or environmental perspectives to justify the practical complexity of considering it.

Highlights

The purpose of this paper is to identify the environmental, macroeconomic and distributional effects of carbon taxation and of the taxation of a multiplicity of air pollution at their external costs
We do so using the recent version of the DGEP, the dynamic general equilibrium model of the Portuguese economy
The macroeconomic and distributional effects of taxing different pollutants at their external costs are closely aligned with the effects of carbon taxation

Summary

Introduction

The purpose of this paper is to identify the environmental, macroeconomic and distributional effects of carbon taxation and of the taxation of a multiplicity of air pollution at their external costs. A key political economy question is the concern with the existence of multiple environmental objectives and the potential need for a large number of policy instruments This is an issue conceptually because as argued above the emissions of many of these pollutants are connected and in practical terms because the political environment is not conducive to the introduction on multiple taxes and/or fees. This raises the question of identifying the effects of an overarching policy to reach the IPCC goals through proper pricing of carbon emissions on the emissions of the co-pollutants and the other greenhouse gases.

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Conclusion