Taxation of Carbon Emissions and Air Pollution in Intertemporal Optimization Frameworks with Social and Private Discount Rates

Jacqueline Adelowo, Mathias Mier and Christoph Weissbart

No 360, ifo Working Paper Series from ifo Institute - Leibniz Institute for Economic Research at the University of Munich

Abstract: Current policies focus on reducing CO2 emissions, neglecting the existence and impact of other air pollutants such as NO2, NH3, NMVOC, PPM10, PPM2.5, and SO2. We devise a strategy to model those emissions and related social cost accounting for diverging social and private discount rates in an intertemporal optimization framework that aims to predict firm behavior. We derive optimal CO2 and air pollution taxes above the social cost of carbon or social cost of air pollution, respectively, when social discount rates are below private ones. We implement the modeling strategy in the EUREGEN model to determine the technology and emission mix of the European power market until 2050 and quantify aggregated social cost. No taxation yields aggregated social cost of 5,145 billion € in the period 2020 to 2050. Taxing CO2 emissions only leads to aggregated social cost of 794 billion € and promotes the deployment of CCS technologies. Taxing air pollution only results in aggregated social cost of 2,091 billion € and fosters the deployment of nuclear. Taxing both reduces cost to 622 billion €. Wind and solar are almost unaffected by internalization choices.

Keywords: Taxation; Intertemporal Optimization; Social Cost; Air Pollution; Carbon Emission; Externality; Energy System Model; Power Market Model; Decarbonization (search for similar items in EconPapers)
JEL-codes: C61 C68 Q40 Q41 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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