Tax Policy to Reduce Carbon Emissions in a Distorted Economy: Illustrations from a South Africa CGE Model

Devarajan Shantayanan (), Delfin Go, Sherman Robinson and Thierfelder Karen ()
Additional contact information
Devarajan Shantayanan: World Bank
Thierfelder Karen: United States Naval Academy

The B.E. Journal of Economic Analysis & Policy, 2011, vol. 11, issue 1, 24

Abstract: Noting that developing countries may not have the administrative capacity to levy a “pure” carbon tax, we compare the impact of alternative energy taxes with that of a carbon tax in an economy with multiple distortions. We use a disaggregated computable general equilibrium (CGE) model of the South African economy and simulate a range of tax policies that reduce CO2 emissions by 15 percent. Consistent with a “first-best” economy, a carbon tax will have the lowest marginal cost of abatement. But the relationship between a tax on energy commodities and one on pollution-intensive commodities depends critically on other distortions in the system and on structural rigidities in the economy. We demonstrate that if South Africa were able to remove distortions in the labor market, the cost of carbon taxation would be negligible. We conclude that the welfare costs of taxing carbon emissions in developing countries depend more on other distortions than on the country’s own carbon emissions.

Keywords: carbon tax; carbon emission; marginal cost of abatement; tax policy (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (45)

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DOI: 10.2202/1935-1682.2376

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