Carbon tariffs and energy subsidies: Synergy or antagonism?

Xiang Cheng, Wenfu Wang, Xueli Chen, Wei Zhang and Malin Song

Energy, 2024, vol. 306, issue C

Abstract: Carbon tariffs represent an alternative mechanism devised by developed nations to combat climate change, yet their ramifications on the economies of developing nations necessitate deeper investigation. This study introduces a new open economy macroeconomic framework incorporating bilateral trade dynamics to analyze the effects of forthcoming carbon tariff policies on developing economies. Our research reveals that carbon tariffs, on the one hand, reduce the exports of intermediate goods from developing countries, thereby worsening their domestic economic development. On the other hand, they will curb fossil energy consumption in developing countries, improving air quality. Additionally, we propose two common policies that may mitigate the adverse effects of carbon tariff shocks on developing countries, namely, subsidies by developing country governments for the domestic use of renewable energy (Renewable Energy Subsidy Policy, RESP) and tax incentive discounts for the domestic use of fossil energy (Tax Discount on Fossil Fuels, TDFF). Our analysis shows that the RESP outperforms the TDFF in facilitating the transition to renewable energy, incentivizing structural reforms in corporate energy consumption, and improving environmental quality. Furthermore, variations in conditional consumption compensation within RESP are about 10 times that of TDFF under identical circumstances, leading to higher household welfare levels. We argue that despite the antagonistic impacts of RESP and TDFF on carbon tariffs, there are synergistic effects between RESP and carbon tariffs, particularly concerning environmental improvement. This offers a theoretical foundation for the policy responses of developing countries to carbon tariffs.

Keywords: Carbon tariff; Energy subsidies; Tax discount; New open economy macroeconomic model; Conditional consumption compensation variation (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:energy:v:306:y:2024:i:c:s0360544224023375

DOI: 10.1016/j.energy.2024.132563

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