The economic effects of carbon pricing policies : the effectiveness of pricing policies from an economic modelling perspective

Abstract

The taxation of Greenhouse Gas Emissions (GHG) emissions such as CO2 could play an important role in achieving the Paris Agreement and thereby curtail the impacts of climate change. Such price policies do not only affect the targeted matter, as the emissions themselves, but can have unanticipated side effects as “carbon leakage” or “green paradox”. These can change not only the economy impact but can also have an influence of the anticipated performance of the tax. The economic as well as environmental effects of price policies such as taxes depend on changing circumstantial factors. All these factors have an impact on the “Effective Elasticity” of the taxation. This Elasticity is the overall relative change of energy demand (and the connected emissions) with respect to the relative change in energy prices due to the tax-markup after the inclusion of feedbacks of the economic system. This final elasticity thereby represents their efficiency of the tax. In this thesis factors that influence the overall elasticity as the economy’s structure, income inequality, trade, labour market situation, the domestic price system and the impact of revenue redistribution are investigated by using the macroeconomic model to simulate the effects of CO2 emission taxes. I present a full description of the elaborated model and apply different variants of the model to scenarios that allows uncovering possible feedbacks of the economic system. The applications comprise (a) carbon pricing in for Austria, (b) estimate the carbon footprint connected to household income, (c) compare two carbon taxation schemes and (d) investigate tax revenue recycling possibilities and their social economic consequences. The results show that the performance of a CO2 tax is significantly influenced by the feedbacks of the economy. Depending on the regional and sectoral coverage of the tax, the economic situation, trade positions and the selected way of revenue recycling the initial change of energy demand due to the tax can be amplified or dampened, leading to a quite different overall effective elasticity.