Revenue Recycling Research Articles

A Nonlinear Analysis of Carbon Pricing Mechanisms: Comparing the Economic Impacts of Carbon Tax and Emissions Trading Schemes in Developing Economies

This study evaluates the relative effectiveness of Carbon Tax and Emission Trading Schemes (ETS), for developing economies, in promoting economic growth as well as emission reductions. A systematic literature review (SLR) analyzing 36 studies is employed for this purpose. Findings reveal that Carbon Tax brings temporary economic deceleration but fuels long-term sustainability with clearer direct impacts. ETS also achieves the same objectives with greater flexibility thereby offsetting the negative impacts of Carbon Pricing via price volatility. Revenue recycling is a key tool to address economic disbenefits. This study sheds an urgent light on the imperatives for region-specific policy designs and forthcoming hybrid mechanisms as well as longitudinal socioeconomic effect investigation among underrepresented developing regions.

Carbon pricing acceptance – the role of revenue recycling among households and companies in Norway

ABSTRACT Effective carbon taxation is essential for achieving the green transition. However, there is typically stiff opposition to carbon taxation due to adverse equity and other impacts. Hence, it is essential to get a better understanding of which factors, including the use of tax revenue, can increase acceptability. To date, stated preference methods, rarely used to analyse this issue, have focused only on households. We conduct two national choice experiment surveys of Norwegian households and companies. The experiments include carbon taxes on transport fuel and associated emission reductions and different revenue recycling options as attributes. We find that both groups are more accepting of higher tax levels if the revenues finance climate change mitigation efforts. There is some heterogeneity among the groups with regard to using revenues to reduce different dimensions of inequality. Simulating policy scenarios, we find acceptance for the highest carbon tax among both groups when the revenues are used both to finance climate change mitigation efforts and to reduce rural-urban inequalities. This policy option points to an acceptable carbon tax close to an estimated level necessary for reaching the most ambitious climate target set by the Norwegian government. In Norway, further research should explore whether an effective carbon tax level could be achieved with modest efficiency loss, while also alleviating inequality.

Public acceptability of carbon pricing: unravelling the impact of revenue recycling

ABSTRACT Carbon pricing has emerged as a prominent policy tool to mitigate climate change due to its proclaimed high efficiency and effectiveness. However, the successful and sustainable implementation of carbon pricing also depends on the public acceptability. This paper investigates how revenue recycling shapes public attitudes towards carbon pricing. A systematic literature review identified 48 relevant studies from 2004 to March 2023. Using qualitative content analysis I discern relevant factors and construct a typology of revenue recycling options. Subsequently, a consensus ordinal ranking of revenue recycling options, based on the empirical findings of the reviewed studies, synthesizes current knowledge. The results reveal that revenue recycling has a crucial impact on public acceptability. While environmental earmarking ranks highest, and reducing corporate taxes is the least preferred option, numerous other revenue recycling options lie between these two options. Moreover, the literature presents divergent findings regarding the level of public acceptability of specific revenue recycling options. The diversity of research contexts and designs introduces inherent limitations that may explain variations in rankings observed across different studies. Notably, I identify political trust related to and salience of revenue recycling as important factors affecting public acceptability of carbon pricing. Finally, this research offers a framework for policymakers seeking to design revenue recycling strategies that align with public preferences to implement carbon pricing.

Can carbon tax revenue recycling coordinate climate mitigation and energy poverty alleviation?

Energy poverty is a key dimension of multidimensional poverty and a major challenge for climate action. This study examines how climate policies affect energy poverty, especially the role of carbon tax revenue recycling in coordinating climate mitigation and energy poverty alleviation. Using an integrated Climate-Economy-Energy Poverty (RICE-EP) model that incorporates inequality aspects of energy poverty, the study analyzes the effects of climate policies on household energy consumption. The study simulates various scenarios of climate actions and carbon tax revenue recycling and finds that: i) Carbon tax revenue recycling can simultaneously advance climate change mitigation and energy poverty reduction goals, it can promote climate mitigation and enhance equity by lowering the abatement costs borne by low-income populations; ii) However, the interactions between stringent climate targets and energy affordability are complex. Modeling suggests that even optimal revenue recycling fails to prevent exacerbated energy poverty among disadvantaged groups under ambitious 2 °C climate targets; iii) Analysis indicates that an emissions reduction rate approaching 43 %, enabled by a carbon tax calibrated to incentivize an equitable transition, could maximize alleviation of energy poverty by directing subsidy support to low-income groups. The study methodology and findings offer valuable, actionable insights into coordinating equitable climate and economic policies.

Does carbon pricing policy improve energy efficiency? New evidence from Canadian provinces

ABSTRACT Given the increasing damage effect of climate change, the Canadian government has taken a further step to ensure that carbon pricing is implemented in all provinces to reduce its GHGs emissions as a means of addressing climate change. Thus, this paper examines the effect of carbon pricing on energy consumption which is the main source of CO2 emission to enhance our understanding beyond carbon-pricing effects on households and revenue recycling in the prior research. Our study analyzes the energy efficiency of Canada using the province-level data between 2000 and 2021, by developing an SFA production model to understand the drivers of energy consumption and then compute the total factor energy efficiency index while controlling for the role of carbon pricing. Our empirical results reveal that increased labor input, as well as output, mitigate the rising capital-induced energy consumption, while carbon pricing policy plays no significant role in influencing energy consumption. However, the effectiveness of carbon pricing is found in reducing province-level energy efficiency. This striking evidence suggests that policymakers should consider a labor-oriented energy saving scheme and conduct a comprehensive review of the current carbon pricing policy in order to align with energy efficiency interventions toward the achievement of Canada’s Paris Agreement targets.

Investigating the mechanisms linking revenue recycling to increased political acceptability of carbon pricing

AbstractThis paper analyzes the causal relationship between the carbon tax's revenue recycling measures and political acceptability. The Irish carbon tax reform of 2019 forms the basis of the study. The findings are based on deductive content analysis and semi‐structured, elite interviews with key politicians, climate policy advisors, and other influential figures involved in the policy‐making process. Analyzing the extensive Irish revenue recycling scheme, encompassing compensatory measures and various forms of climate spending, provides researchers with the chance to track distinctive causal mechanisms over the course of a politically intense period, leading up to general elections. The results show that relief measures were crucial to alleviate concerns about the negative distributional impact of the policy, which was fiercely attacked by some opposition parties. Additionally, climate spending increased political acceptance by offering low‐carbon alternatives to consumers, even though the policy was initially construed as punitive measure, especially in regions and sectors where switching to low‐carbon options, public transport, or less carbon intense heating, were challenging or even impossible. A unique finding of the study is that revenue recycling facilitates the emergence of cross‐party agreement among ideologically distant parties. Another crucial contribution of this study is the detailed comparison, from the perspective of political acceptability, of two alternative social compensation models, the fee and dividend model, and the integration of targeted social cushioning and climate spending (hypothecation).

Resilience of Saudi Arabia’s Economy to Oil Shocks: Effects of Economic Reforms

We assess the extent to which the implementation of Vision 2030 policies enhances the Saudi economy’s resilience to oil shocks. Using a dynamic stochastic general equilibrium model that captures the country’s economic diversification policies, we build a resilience index based on impulse responses to shocks. The policies considered have two opposite effects: reforming domestic energy prices, deploying renewables and introducing a value-added tax increase the volatility of macroeconomic aggregates, whereas economic diversification policies stabilize the economy. Overall, with Vision 2030 the economy’s resilience to oil price shocks increases by 10 to 60 percent, depending on how labor market rigidities and the recycling of fiscal revenues are accounted for. Oil prices remain the main driver of macroeconomic fluctuations. Our analysis shows that an oil-exporting country should design policy packages that balance structural reforms with economic diversification, in order to shield its economy against oil shocks while generating long-term welfare gains. JEL Classification: D58, E13, E32, E37, E65, H30, H50, Q43

Economic impacts of meeting China's NDC through carbon taxes with alternative schemes for recycling tax revenues

This study examines the impact of meeting China's Paris Climate Agreement commitment to reduce its emission intensity by 65 % below 2005 levels by 2030 through various policy instruments. We use a dynamic recursive computable general equilibrium model to simulate the economy-wide impacts of administrative mandates and carbon taxes using different revenue recycling schemes. China's GDP in 2030 would be approximately 1 % lower than the baseline if carbon emissions were constrained by mandates. The commitment's economic costs are lower than the carbon constraint case, regardless of revenue recycling. Economic costs are the lowest when carbon tax revenue is recycled to reduce taxes on capital or corporate income. Subsidizing solar and wind energy further reduces emissions, but at a higher economic cost with a GDP loss of about 0.53 %–0.58 % from the baseline. The results highlight the importance of proper design architecture to make carbon taxes more palatable to policymakers and taxpayers.

Efficiency–equity trade-off in the Irish carbon tax: A CGE investigation of mixed revenue recycling schemes

The literature shows that earmarking carbon tax revenues to reduce other distortionary taxes can mitigate the tax’s adverse economic implications, whereas transferring revenues directly to households can reduce the tax’s negative equity implications. This paper employs a dynamic applied general equilibrium model to examine the inherent efficiency–equity trade-off in Irish carbon tax revenue recycling (RR). We analyse pure RR schemes, where total carbon tax revenues are allocated either to increased household transfers or to tax rate reductions and mixed schemes, which combine these two. The findings show that all tax reduction RR options can reduce emissions while increasing gross domestic product and welfare (creating a double dividend), but they also increase inequality. However, when sales tax reductions are combined with household transfers, increased efficiency and equity can be found, resulting in a triple dividend. This paper contributes to the literature by directly investigating the efficiency–equity trade-offs in detailed mixed RR schemes. From a policy perspective, we conclude that mixed RR options generate better outcomes as the government can directly balance efficiency and equity outcomes.

Public support for carbon tax in South Korea: The role of tax design and revenue recycling

AbstractCarbon tax is widely regarded as an effective and efficient method to reduce carbon emissions. However, the introduction of carbon tax has faced resistance from the public and interest groups. In this article, we examine the determinants of public support for carbon taxation in South Korea. While the expected cost of the carbon tax on individual citizens appears to be the most important determinant of preferences towards carbon tax, we also find that the public support changes depending on the design of the revenue recycling system. The public is more likely to support a carbon tax scheme that is earmarked to support the energy‐poor population compared to one that uses tax revenues for general government expenditures. The use of carbon tax revenues to create green sector jobs appears to significantly increase the support for carbon tax compared to the use of revenue for the general environment budget. Our findings suggest that while opposition towards carbon tax exists, certain design features such as universal carbon dividends can alleviate some resistance from the public.

Computable general equilibrium analysis of neutral carbon trading scheme and revenue recycling impacts on income distribution in China

Utilizing a dynamic computable general equilibrium (CGE) model, this paper critically assesses the potential distortions and efficacy of various revenue-neutral carbon emission trading schemes (ETSs) in China, through government subsidies and value-added tax (VAT) relief strategies aimed at achieving peak carbon emissions before 2030. The analysis reveals that reallocating market revenues to the production sector, either through government subsidies or VAT reductions, can feasibly attain carbon peaking before 2030, with minimal impact on GDP. Notably, both government subsidies and VAT cuts foster output growth in the oil, gas, and ETS-covered sectors. Moreover, directing carbon market revenue toward ETS-covered industries via VAT relief emerges as the most effective approach to reducing income disparities. In contrast, redistributing carbon market revenue to non-ETS-covered industries via VAT relief is found to be the least effective in promoting social equity. The study emphasizes that the reallocation of carbon market revenues to ETS-covered sectors is paramount. This strategy not only regulates the overall energy consumption effectively but also steers the nation towards a more sustainable and optimized energy consumption pattern. In light of these findings, this paper offers detailed insights and tailored policy recommendations, aiming to assist policymakers in striking a balance between environmental goals and economic and social imperatives.

Public Support and Willingness to Pay for a Carbon Tax in Hungary: Can Revenue Recycling Make a Difference?

Public Support and Willingness to Pay for a Carbon Tax in Hungary: Can Revenue Recycling Make a Difference?

Carbon Pricing is not Unjust.

The aim of this perspective is to argue that carbon pricing is not unjust. Two important dimensions of justice are distributive and procedural (sometimes called "participatory") justice. In terms of distributive justice, it is argued that carbon pricing can be made distributionally just through revenue recycling and that it should be expected that even neutral reductions in emissions will generate progressive benefits, both internationally and regionally. In terms of procedural justice, it is argued that carbon pricing is in principle compatible with any procedure; however, there is also a particular morally justifiable procedure, the Citizens' Assembly, which has been implemented in Ireland on this precise question and has generated broad agreement on carbon pricing. It is suggested that this morally matters because such groups are like "ideal advisors" that offer morally important advice. Finally, an independent objection is offered to some ambitious alternatives to carbon pricing like Green New Deal-type frameworks, frameworks that aim to simultaneously tackle multiple social challenges. The objection is that these will take too long to work in a climate context, both to develop and to iterate.

How carbon pricing affects multiple human needs: An agent-based model analysis

Climate policy is urgently needed to reduce emissions, but must also be evaluated in regard to its impact on human quality of life. To identify policy approaches that are able to achieve effective mitigation together with high levels of well-being, multiple human needs must be taken into account. To this end, we present an agent-based model that is able to describe the interaction between various economic sectors on the supply-side and individuals with heterogeneous incomes and needs on the demand-side. Individuals make choices under both income and time constraints; the latter being needed for non-market activities and time-intensive forms of consumption such as low-carbon modes of transport. The following climate policy instruments are considered: a carbon tax, permit trading, direct regulation, and investments in low-carbon infrastructure. Impacts are analyzed in regard to three different types of mitigation: avoid, shift, and improve. Results show that to achieve emission reductions together with high levels of well-being, carbon pricing is best combined with effective improvements of low-carbon infrastructure; revenue recycling should be progressive; and unnecessary abatement costs should be avoided. A comparison is provided with traditional formulations of social welfare.

The German Environmental Tax Reform: a difference-in-differences analysis of its impacts in European comparison

AbstractIn 1998, the red-green Schröder government implemented the Environmental Tax Reform (ETR), raising taxes on petrol, diesel, natural gas and heating oil and introducing a new duty on electricity in Germany. At the same time, it cut non-wage labour costs by reducing public pension contributions. The goal was to achieve Germany’s Kyoto Protocol emissions targets and to reduce a level of unemployment unprecedented since World War II while avoiding the burden on the public budget through revenue recycling. Employing microdata from household budget surveys of 1998 and 2003, this article analyses whether increased duties on motor fuels and electricity lead to a substantial reduction in households’ consumption of these goods. Considering the ETR as a natural experiment, it uses the difference-in-differences approach in a European context with Germany as the treatment group and Italy, Spain and the UK as the control group. Ordinary least square regressions reveal that motor fuel demand is price inelastic, while electricity consumption increased despite the substantial rise in prices. Quartile regressions show that the effect of the motor fuel tax is slightly higher at the bottom than at the upper tail of the distribution supporting the notion that low-level consumers are more likely to find alternative substitutes.

Meat taxes in Europe can be designed to avoid overburdening low-income consumers

Consumption taxes on meat have recently been under consideration in several European countries as part of their effort to achieve more sustainable food systems. Yet a major concern is that these taxes might burden low-income households disproportionately. Here we compare different meat tax designs and revenue recycling schemes in terms of their distributional impacts in a large sample of European countries. We find that across all selected tax designs, uncompensated meat taxes are slightly regressive. However, the effect on inequality is mild and can be reversed through revenue recycling via uniform lump-sum transfers in most cases. Using meat tax revenues towards lowering value-added taxes on fruit and vegetable products dampens but does not fully offset the regressive effect. Variation in the distributional impact can be explained by cross-country heterogeneity in consumption patterns, design choices between unit-based and ad valorem taxation and differentiation according to greenhouse gas intensities.

Pathways to stringent carbon pricing: Configurations of political economy conditions and revenue recycling strategies. A comparison of thirty national level policies

There is general agreement among economists and climate policy practitioners that carbon pricing should play a central role among all policies used to tackle climate change effectively. However, in most jurisdictions that have adopted carbon pricing mechanisms, the prevailing price levels remain too low to accelerate decarbonization and drive down emissions. This deficiency can be attributed to numerous political economy constraints, but most pressingly, to the negative distributional effects of the policies combined with the drain they impose on firms' competitiveness. These factors negatively influence the public acceptability of these policies and, thus, the feasibility of introducing ambitious carbon pricing. Recent innovations in the literature suggest that using the revenue from carbon pricing for specific social purposes may ease this political impasse. This study analyzes which revenue recycling strategies are effective, in various political economy environments, to support stringent carbon pricing. Employing the method of fuzzy-set Qualitative Comparative Analysis, this research draws findings from a cross-case comparison of thirty national-level policies. The salient conclusion is that hybrid use of carbon revenue that combines various compensatory schemes and spending on climate projects is the most effective strategy to enhance stringency, while a lack of compensation renders the introduction of ambitious carbon pricing implausible, even in some highly developed countries.

Impact of Natural Disasters on Household Income and Expenditure Inequality in China

Natural disasters have been demonstrated to cause devastating effects on economic and social development in China, but little is known about the relationship between natural disasters and income at the household level. This study explores the impact of natural disasters on household income, expenditure, and inequality in China as the first study of this nature for the country. The empirical analysis is conducted based on a unique panel dataset that contains six waves of the Chinese Household Income Project (CHIP) survey data over the 1988–2018 period, data on natural disasters, and other social and economic status of households. By employing the fixed effects models, we find that disasters increase contemporaneous levels of income inequality, and disasters that occurred in the previous year significantly increase expenditure inequality. Natural disasters increase operating income inequality but decrease transfer income inequality. Poor households are found to be more vulnerable to disasters and suffer significant income losses. However, there is no evidence to suggest that natural disasters significantly reduce the income of upper- and middle-income groups. These findings have important implications for policies aimed at poverty alleviation and revenue recycling, as they can help improve economic justice and enhance resilience to natural disasters.

Recycling scheme of carbon pricing for inclusive decarbonization and energy transition: A recursive computable general equilibrium analysis in China

Revenue recycling is crucial for carbon pricing to achieve inclusive decarbonization and energy transition. Several studies have documented carbon pricing recycling, but few focused on mixed recycling schemes that allocate revenues across multiple institutions. To fill this knowledge gap, we employ a newly developed recursive computable general equilibrium model to explore the socioeconomic consequences of various recycling schemes in the context of China. We find that: (1) Although carbon pricing promotes renewable energy, it adversely affects social welfare and urban–rural equality. When executing the recycling scheme, this negative effect is alleviated. (2) All single recycling scenarios fail to yield a double dividend. They remain detrimental to social welfare and urban–rural equality. (3) Despite small welfare loss, a moderate-share renewables-based mixed recycling scheme reduces urban–rural inequality while favoring decarbonization and energy transition. Our study calls for incorporating mixed recycling options into the policy toolbox in advancing carbon pricing.

Carbon tax accompanied by a revenue recycling increases Australia's GDP: A dynamic recursive CGE approach

This study employs the dynamic recursive Computable General Equilibrium (CGE) approach to model Australia's economy. This carbon tax policy is designed based on Australia's economy, starting at A$23/tCO2, increasing over time and imposing uniformly on all industries. This study proposes two carbon tax policies and three revenue recycling approaches, and the prices and GDP variations are estimated during 2020 and 2035. This study confirms introducing a carbon tax policy decreases Australia's carbon emissions and reduces real consumption and GDP if it is not accompanied by a revenue recycling policy.But following a revenue-neutral policy and redirecting the carbon tax revenue into the economy through reducing income taxes and investing in research and development (R&D) projects leads to economic growth. This study confirms the implementation of a carbon tax associated with a suitable revenue recycling approach benefits Australia both economically and environmentally.