The Effect of Carbon Taxes on Energy Use by the Manufacturing Sector of Taiwan

Abstract

This study evaluates the possible impact of carbon taxes on the most important sector of a newly industrialized economy. Changes in the energy consumption pattern and the resulting carbon dioxide emissions are analyzed for the entire manufacturing sector as well as four energy-intensive industries of Taiwan. A carbon tax is imposed as a predetermined, fixed tax on each type of energy according to its carbon content. Simulations are performed, using atwo-stage translog price model, for a reference case and for four different levels of carbon taxes.The results indicate that a high tax is expected to stabilize CO2 emissions to the 1990 level by the year 2005 while maintaining a 5% growth rate in the manufacturing sector. Reductions in energy consumptionand CO2 emissions resulting from such taxes are substantial, and are sensitive to the tax level. Prices of energy aggregates increase due to a carbon tax and are directly related to the increase in the level of the carbon tax. Industries react differently to the tax in choosing their energy mix. Specifically, a decrease in the share allocated to coal inputs and an increase in the shares of oil, natural gas, and noncarbon energy inputs in its energy mix is observed in the electricity generation sector.