Revenue Recycling Research Articles

The Impacts of Removing Fossil Fuel Subsidies and Increasing Carbon Taxation in Ireland

Though the magnitude of fossil fuel subsidies eclipses carbon pricing revenues, policies and economic literature focus on carbon taxation. This paper aims to show that removing fossil fuel subsidies can reduce emissions as much as carbon taxation without making producers and consumers worse off. Using a dynamic intertemporal CGE model of Ireland, we compare removing eight Irish fossil fuel subsidies and increasing the carbon tax to €100 per tonne by 2030. We find that both policies result in similar emission reductions. Carbon taxation results in lower negative GDP and investment impacts, whereas subsidy removal results in lower negative employment impacts, higher revenues, an improved trade balance and lower debt. The impacts across sectors and households are distributed more evenly under a carbon tax, where subsidy removal results in extreme impacts for specific sectors and households. Excluding households’ subsidies from removal can alleviate these household distributional impacts at no cost to emission reduction. With revenue recycling reducing tax rates, a double-dividend is found at the expense of worsened income distribution. The economic benefit of revenue recycling is greater when removing subsidies than with carbon taxation and results confirm the importance of fossil fuel subsidies in climate policy.

How can a carbon tax benefit developing economies with informality? A CGE analysis for Côte d’Ivoire

ABSTRACT This study investigates how a carbon tax could reduce fiscal and economic distortions as well as cut carbon emissions in developing-country economies. A computable general equilibrium model is developed to analyze the economic impacts of a hypothetical carbon tax in Côte d’Ivoire, a country in Sub-Saharan Africa with large losses of tax revenues due to informality and leakage. The model represents informal as well as formal production activities. The analysis shows that the economic impacts of a carbon tax and the levels of CO2 reduction vary significantly among alternatives for recycling the carbon tax revenue. A carbon tax with revenues recycled to reduce the existing value-added tax would increase GDP and economic welfare. If the revenue is used to cut the existing tax on labour, the carbon tax would not only increase GDP but also induce the migration of workers from informal to formal activities. The analysis also shows that if energy producers are not excluded from carbon tax revenue recycling, the carbon emission reduction is significantly lower due to a rebound effect. A carbon tax with lump-sum transfers of revenues to households would be progressive as the revenue is equally transferred to all households, but it reduces economic output and does not help reduce informal economic activities.

Are tax revenue recycling schemes based on industry-differentiated carbon tax conducive to realizing the “double dividend”?

Carbon tax policies based on industry differences can produce better emission reductions, but their economic losses have not been fully considered. To guarantee the fairness and economic effectiveness of the carbon emission reduction, this paper explores the policy impacts of revenue recycling schemes based on industry-differentiated carbon taxes using a dynamic CGE model. The findings show that revenue recycling schemes can effectively mitigate the negative macroeconomic and industry output impacts of industry-differentiated carbon taxes, but also affects their carbon reduction effects. The indirect carbon tax revenue recycling schemes are more beneficial than the direct recycling schemes in reducing GDP loss, and corporate income tax reduction is most effective in mitigating the reduction in fixed asset investment. The applicability of different carbon tax revenue recycling schemes varies across industries, and in general corporate income tax reduction and subsidies to clean energy industries are more beneficial to carbon emission reduction, and indirect carbon tax revenue recycling schemes that reduce residential and corporate income taxes can achieve stronger “double dividend”. This paper suggests that China should adopt a industry-differentiated carbon tax with a fair distribution of emission reduction responsibilities, while achieving a “double dividend” through appropriate revenue recycling schemes.

Rethinking the equity and efficiency of carbon tax: A novel perspective

Previous research has generally concluded that carbon tax is regressive, despite its efficacy in reducing emissions. This paper takes a deeper dive to explore the validity of this assertion and proposes alternative approaches to enhance the efficiency of carbon tax without revenue recycling. Our argument asserts that the efficiency of a carbon tax can be determined by adjusting tax coverage. Furthermore, we find that taxing solely on energy production industries rather than the entire industry can significantly improve mitigation efficiency. Our findings also indicate that the carbon footprint and the emissions per unit cost for a given energy source account for the observed regressivity. Specifically, the wealthy consume commodities with higher carbon footprints, an indirect and invisible factor. However, it is important to note that the poor allocate a significantly greater proportion of their budget toward energy consumption, which is a visible and direct concern. Based on these findings, we provide several policy implications.

Regional Impact Analysis of Carbon Tax Implementation on Indonesia’s Coal Power Plant with Interregional Input-output Method

The excessive use of greenhouse gases (mainly carbon dioxide) causes a global emission of greenhouse gases. This has eventually brought climate change and global warming, that will affect the human life standard. Also it has several economical impacts such as increasing the mitigation budget for anticipating the climate change problems by applying a carbon tax as one of strategies to reduce carbon emissions. Carbon tax is one of additional economic instrument and has high possibility to be implemented in Indonesia to help its future low carbon development especially on energy sector. Under such a circumstance, this paper aims to predict the possible impact of implementing a carbon tax implementation on Coal Power Plant (CPP) and revenue recycling for 6 regions in Indonesia i.e. Sumatera, Jawa, Bali and Nusa Tenggara, Kalimantan, Sulawesi, Maluku and Papua. The IRIO (InterRegional InputOutput) model of six regions in Indonesia has been developed based on the Central Bureau of Statistics with seventeen sectors in 2016 to evaluate the impact of carbon taxes with a carbon price of 2,1 USD/ton on CPP and to show the scenarios for the distribution impact of carbon tax revenues on output, wages, and GRDP. The results show the implementation of a carbon price of e 2.1USD/ton will give extra revenue of around 241 Billion Rupiah nationally with the distribution of 73%, 15%, 7%, 3%, 2%, and 1% from Java, Sumatera, Kalimantan, Bali-Nusa Tenggara, and Maluku-Papua, respectively. Through revenue recycling, those values could increase the total output, wages, and GDRP per region by around 451, 100, and 169 Billion Rupiah, respectively. The revenue recyling option and its economic impact for each 17 sectors are also identified in the study with spesific characteristics for each region. In conclusion, the result could help the government determine its climate change mitigation strategy, so it could boost the regional economy. Based on the study results, this paper recommends the government to conduct an intensive monitoring and evaluation on low carbon policies for CPP in Java and Sulawesi.

Emission Reduction via Fossil Fuel Subsidy Removal and Carbon Pricing, Creating Synergies with Revenue Recycling

The removal of fossil fuel subsidies and the introduction of carbon pricing have been discussed for more than a decade, but their potential contribution to emission reduction is still uncertain, especially in relation to the potential indirect impact of revenue recycling. We have created a simulation model, GSI-IF, designed to assess the emission reduction potential resulting from removing fossil fuel subsidies and recycling part of the avoided subsidy and additional revenue from carbon pricing to renewable energy and energy efficiency. Our results show that emissions could decline by 7.1% in 2030 and up to 19.8% in 2050 compared to a baseline scenario. We find that subsidy removal is most effective in reducing emissions in countries with a high incidence of fossil fuel subsidies and it has stronger impact in the short term. The recycling of carbon pricing is most relevant for larger economies and its impact accumulates over time, generating growing GHG reductions year after year. In the current context (year 2022) with high energy prices, heavy stress on fiscal balances, and the renewed ambition of most governments to reduce emissions toward Net Zero in 2050, subsidy removal and carbon pricing hold promise in the toolbox of decarbonization options while improving fiscal sustainability.

Carbon Tax and Tourism Employment: Is There An Interplay?

The impact of the climate change response on the labour market is an important question for policymakers, while the net positive effect of green policies on the labour market is seen as one of the arguments in favour of a green transition. This is particularly important for the tourism labour market, which was severely hit by the COVID-19 pandemic. This study examined the effect of carbon taxes on tourism employment for European countries that have levied a carbon tax over the past thirty years. A macroeconomic panel data regression model ex-post study was applied by contrasting the obtained results via a robustness check. The estimation results indicate a slightly positive and significant association between the carbon tax and tourism employment, which was additionally tested by considering revenue recycling, early adopters of the carbon tax, and a higher carbon tax compared to countries with a lower carbon tax. We cannot conclude that these factors matter for tourism employment, proving the robustness of the results. Revenue-neutral carbon taxation, policies to address the skills gap, push and pull incentives, and active labour market policies to facilitate the quick re-integration of jobseekers into employment are viewed as pivotal to ensure a smoother transition toward a sustainable tourism labour market.

Carbon Pricing Costs for Households and the Progressivity of Revenue Recycling Options in Canada

La politique fédérale canadienne exige que toutes les provinces et tous les territoires adoptent un prix plancher sur les émissions de gaz à effet de serre ou se dotent d’un instrument équivalent de mesure quantitative. Les provinces qui mettent en place un système conforme au modèle fédéral conservent le contrôle de leurs revenus. Les provinces qui n’établissent pas de tarif pour la pollution par le carbone sont assujetties à un système de tarification administré par le gouvernement fédéral, qui redistribue les revenus aux ménages au moyen de rabais forfaitaires. À partir d’un riche ensemble de microdonnées synthétiques sur les ménages, nous quantifions pour chaque province le fardeau fiscal direct et indirect des ménages et les revenus provenant de la tarification du carbone. Nous calculons également pour chacune la part du revenu disponible provenant de la tarification du carbone. À l’aide de ces données, nous mesurons le cout net pour les ménages et la progressivité globale de la tarification du carbone, selon quatre scénarios de recyclage des recettes : (a) une augmentation du crédit pour la taxe de vente en fonction du critère de revenus, (b) un dividende forfaitaire, (c) une diminution du taux de la taxe de vente, et (d) une augmentation de l’exemption de base de l’impôt sur le revenu des particuliers. Nous constatons que la taxe sur le carbone est généralement progressive, même sans recyclage des recettes ; que le crédit pour la taxe de vente et le remboursement forfaitaire sont progressifs ; que la diminution du taux de la taxe de vente est généralement régressive, et que la modification de l’impôt sur le revenu est régressive. Nous montrons également que le système de tarification canadien pour les grands émetteurs, fondé sur le rendement, aide à atténuer les couts indirects de la tarification du carbone, ce qui réduit de façon marquée les couts pour les ménages.

Public acceptance of fossil fuel subsidy removal can be reinforced with revenue recycling

Removing fossil fuel subsidies is important for mitigation and making carbon pricing polices effective. We find that removing subsidies on fossil fuels may not generate more public resistance (or support) than introducing a carbon tax, and by specifying alternatives for revenue recycling, the level of acceptability may increase.

Fossil fuels subsidy removal and the EU carbon neutrality policy

The complexity of the EU carbon neutrality policy is addressed by evaluating the impacts of the interaction among different policy instruments. An energy-economic dynamic CGE model based on GTAP utilities is developed for simulating different policy scenarios starting from a business as usual case where the economic impacts related to the COVID-19 pandemic and recovery measures are included. The instruments tested as part of the EU climate strategy are the removal of fossil-fuel consumption subsidies, a carbon pricing mechanism and the public support to clean energy technologies. The modelling approach is based on a revenue recycling mechanism to finance clean energy technologies. We find that the simultaneous implementation of all instruments under the EU climate strategy including the removal of subsidies to fossil fuels and the reuse of revenues to foster the technological transition of the energy system is a win-win solution for a sustainable and decarbonised EU economy.

The importance of labour market responses, competitiveness impacts, and revenue recycling in determining the political economy costs of broad carbon taxation in the UK

Despite broad acceptance of the need to drastically reduce carbon emissions and limit global warming, political debates persist regarding the acceptability of actions to internalise carbon costs given potential impacts on the cost-of-living and income generation. We present fundamental macroeconomic and more complex computable general equilibrium analyses to consider how introducing broad carbon taxation might impact key macroeconomic indicators, taking the UK as an applied example. One key insight is that, with no other policy intervention, such a move introduces contractionary pressure through increases in consumer prices that reduces GDP, employment, and household spending, and erodes government revenue gains. The extent of contraction depends on the degree of resistance in labour markets to real wage rate reductions alongside substitutability away from taxed energy in determining prices, and on consequent export demand responses. A second is that where government prioritises balancing its budget, partial recycling of carbon tax revenues aimed at moderating negative impacts on firm costs and household real spending power can reduce wider economy losses. However, this is limited by wage bargaining and domestic consumption responses in a labour supply constrained and very open economy, with income tax recycling minimising macroeconomic losses at the cost of increasingly regressive outcomes.

In pursuit of progressive and effective climate policies: Comparing an air travel carbon tax and a frequent flyer levy

This paper investigates the trade-offs between progressivity and effectiveness for a carbon tax versus an ‘excessive consumption’ levy. To do this, we compare the distribution of consumer welfare impacts and environmental effectiveness of an air travel carbon tax and a frequent flyer levy. Results show that both policies have the potential to achieve substantial carbon mitigation with minimal impacts on consumer welfare. Nevertheless, compared with a carbon tax, a frequent flyer levy is more progressive and effective at reducing emissions – thus, there is no trade-off between progressivity and effectiveness by using an excessive consumption levy to mitigate air travel emissions. Furthermore, considering the pronounced growth in demand projected for air travel over the next 30 years, results show the frequent flyer levy will remain more progressive and effective over time. Although further research is needed to assess the trade-offs on the supply-side (e.g., protection of regular customers, dynamic efficiency) and related to implementation (e.g., data privacy, the role for revenue recycling), such an excessive consumption levy has the potential to be an equitable, effective and politically acceptable environmental policy for curbing carbon dioxide emissions. This is relevant not only for air travel but for other forms of consumption in which the affluent are responsible for a large share of demand and associated carbon emissions.

The distributional effects of China’senvironmental taxation: A multi-regional analysis

Environmental taxation is regarded as an effective tool to improve air quality in China, but its distributional effects causing serious disparity among multi-groups and multi-regions are understudied. Here this paper constructs a multi-regional dynamic recursive computable general equilibrium (CGE) model to explore the distributional effects of China's environmental taxation among different income groups and regions, by specifying the elasticity parameters of urban households' consumption in the model, and combining with various micro-data such as household survey data and environmental statistics database. This paper simulates the air pollution reductions of China's environmental taxation, and the impacts on the income and expenditure of households with various environmental tax rates or manners of tax revenue recycling. Results have shown that China's environmental taxation will widen the gap between different income groups and different regions. Also, such adverse distributional effects will be increased by higher environmental tax rates. However, recycling environmental tax revenues to both households and enterprises can reduce the losses of households' income and consumption. Yet recycling revenues to enterprises is more effective in narrowing the gap between income groups and regions while improving regional economic development. Our findings may pave a way to design appropriate environmental tax rates and tax revenue recycling manners for China's future environmental tax policies at the regional level.

The inequality impacts of the carbon tax in China

Previous research has acknowledged that climate change is likely to expand the wealth gap, and climate policies may further increase inequality. Nevertheless, little research has focused on how climate policies affect inequality. To address this, we employ a Computable General Equilibrium (CGE) model to quantify the inequality impacts of the Chinese carbon taxes. Our CGE model results show that tax impacts on inequality are influenced by distribution of climate damages, tax payments, and recycling of tax revenues. Specifically, a positive correlation between income and climate damage induces lower inequality, compared to a zero or negative correlation. Tax payments by high-income households induce lower inequality than tax payments proportional to or independent from income. Recycling tax revenues to low-income households only induces lower inequality than the other recycling schemes. The results imply that relative utility is determined by absolute income, whereas income inequality only has a slight impact on it. In other words, governments could reduce negative feelings about inequality under a climate policy by increasing national income, even if the climate policy may induce higher inequality.

How Does State-Level Carbon Pricing in the United States Affect Industrial Competitiveness?

Pricing carbon emissions from an individual jurisdiction may harm the competitiveness of local firms, causing the leakage of emissions and economic activity to other regions. Past research concentrates on national carbon prices, but the impacts of subnational carbon prices could be more severe due to the openness of regional economies. We specify a flexible model to capture competition between a plant in a state with electric sector carbon pricing and plants in other states or countries without such pricing. Treating energy prices as a proxy for carbon prices, we estimate model parameters using confidential plant-level Census data, 1982–2011. We simulate the effects on manufacturing output and employment of carbon prices covering the Regional Greenhouse Gas Initiative (RGGI) in the Northeast and Mid-Atlantic regions. A carbon price of $10 per metric ton on electricity output reduces employment in the regulated region by 2.1 percent, and raises employment in nearby states by 0.8 percent, although these estimates do not account for revenue recycling in the RGGI region that could mitigate these employment changes. The effects on output are broadly similar. National employment falls just 0.1 percent, suggesting that domestic plants in other states as opposed to foreign facilities gain the most jobs from state or regional carbon pricing.

China's urban-rural inequality caused by carbon neutrality: A perspective from carbon footprint and decomposed social welfare

Urban-Rural Inequality (URI) is a critical issue that must be solved in carbon neutrality process. However, few studies made a detailed analysis of the URI mechanism. By defining household carbon footprint and decomposed social welfare impact (in the perspective of source-side and use-side impact), and innovatively linking them into a computable general equilibrium model, this paper analyzes the effects of carbon neutrality on URI. The results show that rural residents have a lower carbon footprint, but a higher intensity, which explains why the welfare loss on the use side of rural households is more significant than urban households. Almost all carbon pricing strategies will increase URI without considering carbon revenue recycling. The recycling mechanisms based on population and power consumption are more conducive to narrowing the URI through the source-side welfare impact and help to achieve carbon equity.

Tradable mobility permits in a monocentric city with pre-existing labor taxation: A general equilibrium perspective

This paper studies tradable mobility permit schemes in a monocentric city with a distorting labor tax, considering spatially differentiated allocations of permits to households. Numerical results show that an allocation of permits proportional to labor supply reaches about 99.9% of first-best welfare, clearly outperforming a scheme with lump-sum allocation of permits, and being more efficient than the second-best tax for levels of the labor tax of 20% or higher. This is due to the welfare gains of incentivizing labor supply, which has an effect similar to the revenue recycling effect of conventional road pricing, and that can be optimized by the social planner by exploiting spatial differences. Other alternatives, such as an allocation of permits proportional to distance from the CBD and a cordon-based scheme do not reach those high levels of efficiency. Our results provide insights into the efficiency of tradable driving permit schemes as an alternative to road pricing to tackle present externalities, showing that a spatial differentiation of the allocation of permits can be a powerful instrument in the hands of the regulator.

DOUBLE DIVIDEND REVISITED: NON-REVENUE NEUTRAL TAX REFORMS

The rebound effect requires a rethink of revenue recycling. It is this that this paper offers an alternative to mitigate this effect. Specifically, we adapt and extend the consumption-neutral tax reform of Haibara (Journal of Globalization and Development, 8, 1–11, 2017) to include pollution externalities. Unlike a revenue-neutral tax reform, this reform increases welfare irrespectively of the level of intercommodity tax distortions. With consumption-neutral schemes, exogenous energy efficiency improvements induce higher taxes on the dirty good consumption. Such tax hikes improve welfare more than would be the case in their absence. Consumption-neutral reforms can translate economic costs into a negative rebound effect and increase the first dividend. The double dividend is welcome but need not be a policy priority.

Policy Forum: Carbon Taxes and Fiscal Federalism in Canada—A New Wrinkle to an Old Problem

The federal government intends to increase its minimum carbon tax from $40 per tonne of carbon emissions to $170 per tonne by 2030. The carbon tax increase will have uneven and potentially large impacts on provincial emissions and carbon tax revenue, but little is known about how decisions to recycle these revenues will affect equalization payments to provinces. This article compares baseline equalization payments with simulated payments under various revenue-recycling scenarios given a $170 minimum carbon tax. The simulations demonstrate that recycling carbon tax revenues with offsetting reductions in provincial personal or business income taxes, for example, lowers overall disparities in provincial governments' revenue-raising abilities and reduces the size of the equalization program needed to address these disparities. The article draws attention to an already controversial design feature of the program, the fixed-growth rule. The simulations show that the fixed-growth rule limits the impact of higher carbon tax revenues on equalization, by adjusting payments to ensure that the overall size of the program grows roughly in line with the economy. As a result, any potential savings in aggregate equalization payments from revenue recycling are not realized. The distribution of payments is also affected by the fixed-growth rule. Overequalization often results, with Quebec and sometimes Ontario as the main beneficiaries.

Carbon pricing policy, revenue recycling schemes, and income inequality: A multi-regional dynamic CGE assessment for China

Carbon pricing policies are effective tools for mitigating carbon emissions; however, they also alter income distributions. Progressive individual income tax systems help redistribute income and reduce inequality. This paper evaluates the effects of carbon pricing policies and revenue recycling schemes on inequality and assesses the redistributive effects of individual income tax. We adopt a dynamic multi-regional CGE model and extend it in terms of the labor supply, tax revenue, and government expenditures. We obtain several key findings. Carbon pricing without revenue recycling increased income inequality, and the Gini coefficient was 0.59% and 1.88% higher than the benchmark in 2030 and 2040, respectively. When the revenue was recycled via individual income tax returns, the proportional recycling scheme, i.e., all income groups had the same tax return rate, continued to widen the income gap. The progressive recycling scheme, i.e., lower income groups received higher tax return rates, narrowed the income gap by reducing distortions in the economy and enhancing the redistributive effects of individual income taxes. The Gini coefficient was 0.34% and 0.71% lower than the benchmark in 2030 and 2040, respectively. If the central government allocated the carbon revenue to the local governments via general transfer payments, the redistributive effect was magnified, but a pronounced economic distortion widened the income gap. If the tax return rates were categorized by labor groups, the pronounced vertical effect of the redistributive effect benefited income equality most, while the reranking effect weakened that benefit.